If youâ€™re thinking about building your home from the ground up instead of purchasing an existing home, itâ€™s critical to have a thorough understanding of what the home construction process entails and what it means for your wallet.
How much does building a house cost? The average construction cost for a single-family home that is 2,776 square feet is $237,761, according to the National Association of Home Builders (NAHB). That breaks down to $85.65 per square foot.
Weâ€™ll look at what you should know before building, what factors can change the cost and what steps you can follow along the process, among other things.
What to consider before building a house
Building a home is best for those who are detailed and know what they want, said Frank Nieuwkoop of new-home builder Valecraft Homes Ltd., based in Ottawa, Ontario, Canada. Building is also ideal for people who donâ€™t care as much about cost as long as they get a brand-new home and the ability to pick and choose each feature and finish.
It is â€śalso best for buyers who are patient and willing to endure some bumps along the road,â€ť Nieuwkoop said. â€śIf youâ€™re high stress and donâ€™t want to deal with any issues, you may be better off buying a newer existing home.â€ť
One of the main considerations of building a home is cost. Not only do you have to worry about the expenses related to constructing the house, but youâ€™ll need to factor in the land on which the house will be built. Letâ€™s look at a breakdown of the average cost of building a house, according to data from the NAHB.
You can compare this to the median existing-home sales price, which was $277,700 in May 2019, according to the National Association of Realtors (NAR).
Factors that influence the cost of building a house
The average cost to build a house can give you a general idea of how much youâ€™ll pay, but itâ€™s important to note that the costs of building any home can vary dramatically. For example, where you live can play a huge role in the cost of land and the price of the permits and other fees youâ€™ll need to cover.
There are also other factors that will dictate how much your pay, of course, from the type of home you select to the choices you make for its interior. These factors include:
- Your lot: The NAHB reports that the average cost for a finished lot (including financing) was $91,996 in 2017 â€” the most recent year for which data is available. However, this cost can vary depending on the lot you buy, the size of the lot and the local real estate market in which you buy.
- Home size: The larger the home, the more construction costs youâ€™ll encounter. Larger homes also require more materials (more flooring, more lighting, more fixtures, etc.), which can lead to higher costs in a hurry.
- Upgrades: If you opt for fancy upgrades, youâ€™ll pay more for a new home. Granite or marble, upgraded fixtures and custom woodwork can make any home considerably more expensive. This is one area, however, where you can also save on the costs of building. Where laminate countertops may cost around $30 per square foot, youâ€™ll pay more â€” $50 to $90 per square foot â€” for quartz, according to Home Depot. If you multiply those savings across all the rooms that need counters in your home (kitchen and baths), itâ€™s easy to see how you could pay more or less depending on what you choose.
- Home design: The design of the home can play a factor in cost. If you build a home that has a standard design, you may pay less than if you build a custom home with a unique design or special features. If you design a truly custom home, you may also need to hire an architect to draft a design. An architectâ€™s rate can range from $60 to $125 an hour, according to HomeAdvisor.
- Siding: What you choose to cover the exterior of your home can play a big role in your total price. If you choose a custom stone exterior, you may pay more â€” $35 to $50 per square foot â€” than you would if you choose vinyl siding â€” $2 to $7 per square foot â€” according to HomeAdvisor.
- Landscaping: Will you opt for an elaborate outdoor landscaping scheme or some simple greenery? Your landscaping choices will play a role in the costs of your home, and so will ongoing outdoor maintenance. Youâ€™ll also pay more for a fenced yard.
Should you build or buy your home?
Using the example above of the 2,776-square-foot home, the total sales cost, per the NAHB, would be $427,892. That includes the cost of construction, the lot, financing and more.
Before you choose between building your dream home or shopping among the homes in your desired area, consider the benefits and drawbacks of both options.
Building your own home
- Less competition: Existing homes stayed on the market for an average of 26 days before being sold in May 2019, according to the latest report from the NAR. By selecting your own lot and building a home, you can avoid stiff competition for existing properties and still get the home you want.
- Everything is new: People love that everything will be brand new when they build, Nieuwkoop said. Having new fixtures, a new roof, new appliances and a new HVAC system may also mean youâ€™ll have fewer repair bills during the first few years of homeownership.
- Choose your homeâ€™s location: Building a new home on a lot you choose puts you in the unique position of selecting where youâ€™ll live. This can be advantageous if you hope to live near work or near public transportation, or if you want a lot with a certain view.
- Select your own floor plan and finishes: Whether you build a custom home or select a floor plan through a builder, you get to choose how your new home is set up â€” including your floor plan. You may even be able to select your own finishes, including paint colors, countertops, flooring and cabinets.
- Moving delays: Building a home often means longer delays when it comes to moving. â€śBuilding a home can take as little as two months all the way up to a year,â€ť Nieuwkoop said.
- Building surprises: Especially if you design a custom home, you may not know how the floor plan flows until your home is already built. Fortunately, this isnâ€™t typically a problem with larger builders and developers since they often have model homes you can walk through, Nieuwkoop said.
- Pricing surprises: With custom homes, pricing can easily surge â€” especially if you make changes as the plan moves along. Plus, there are added costs that come with building that many people forget. Adding window blinds and treatments can add up, as can new dĂ©cor, shelving and other interior fixtures that donâ€™t come in the home price. Builders rarely put a fence in the yard, so thatâ€™s possibly another expense to consider.
- Less negotiation power: You may be able to negotiate the price on an existing home if a buyer is motivated to sell, but there may be less wiggle room on the price of a new build.
- Construction traffic: If youâ€™re building in a new development, you may deal with ongoing construction traffic for months or even years.
Buying an existing home
- Save money with existing features: Existing homes can have a lot of additions and upgrades already. These may include mini blinds, a privacy fence and appliances.
- Move in quicker: While it could take months until you move in after closing on an existing home, the timeline typically is faster than if you were building.
- Property maturity: Existing homes tend to have more mature trees and landscaping, which could be advantageous if you donâ€™t like the idea of growing new grass on your own.
- No construction zone: If youâ€™re buying a home in a mature neighborhood, you likely wonâ€™t have to deal with ongoing construction issues.
- Lack of customization: You donâ€™t get to pick out the floor plan or fixtures when you buy an existing home. You get what is there already.
- Upgrade costs: If you buy an existing home that is out of date, you may need to spend thousands to make important updates or replace old fixtures.
- Hidden problems: Existing homes may have problems you donâ€™t see, and home inspectors donâ€™t always find every issue. For example, if a seller replaces drywall after a water leak but doesnâ€™t fix the issue properly, you may not find out about further repairs until after you move in.
The 5 steps of building a house
The process of building a house can vary depending on whether you design it independently or work with a developer. However, the main steps of constructing the house are pretty much the same. Weâ€™ll outline the five steps to building a house from beginning to end, based on insights from Nieuwkoop.
Step No. 1: Create a budget
Before you decide to build or buy a home, itâ€™s crucial to have an understanding of how much you can afford to spend on the land and the construction of the house. The best way to establish a budget is to apply for a mortgage preapproval. That way, youâ€™ll be ready to work with a builder when you decide what you want. If you need extra help and have questions, consult a loan officer or mortgage broker. You can also compare mortgage offers online to help you find the best deal.
Step No. 2: Purchase land or select a lot
Once you have your budget (house and land included), itâ€™s time to find a lot in an existing community or buy land on which you plan to build. Keep in mind that the price of the land you buy will need to be included in your mortgage amount unless you plan to buy the land in cash separately. If youâ€™re choosing a piece of land that hasnâ€™t been developed, you should ask your builder about the costs of adding utilities to the property, cutting down trees or leveling the land.
If youâ€™re buying from a developer or builder who is overseeing the construction of a new neighborhood, itâ€™s possible the price of your chosen lot will be built into the price of the floor plan and home you select, Nieuwkoop said.
Step No. 3: Develop your floor plan and design
Chances are good if youâ€™re working with a builder that theyâ€™ll offer a range of floor plans and new home designs from which you can choose. For custom homes, on the other hand, youâ€™ll likely need to hire an architect to create a realistic housing design that encompasses all the features you want.
During this step, youâ€™ll need to decide how many bedrooms and bathrooms you want, along with the general layout of your home. From there, you can select or design a housing plan that fits your budget and style.
Step No. 4: Select appliances, features and finishes
Once youâ€™ve chosen the layout of your home, youâ€™ll need to choose what goes inside. Work with your builder to decide on the interior finishes in your home, from the kitchen cabinets to your light fixtures, plumbing fixtures, flooring and paint colors.
Step No. 5: Watch the construction of your home
Once your home is commissioned and ready to be built, you can watch as the process takes place over the weeks and months. Ideally, your builder will let you walk through the home during various stages of the process, Nieuwkoop said. By seeing the work firsthand, you may be able to discover and point out issues that need to be addressed, such as incorrect fixtures or design problems.
Financing your homeâ€™s construction
The process for financing a new build is similar to financing the purchase of an existing home, according to mortgage adviser Jeremy Schachter of Fairway Independent Mortgage Corp. in Phoenix.
When you build a home, itâ€™s crucial to get a mortgage preapproval with a bank or lender. During this process, the lender will take a look at your credit score, income, assets and debts to determine how much you can borrow.
The biggest difference with a new build is that youâ€™ll likely need to get preapproved for a mortgage once and then start a portion of the process over again, especially if the process spans several months, Schachter noted, adding that the final home closing doesnâ€™t take place until the house is completed, and that at this stage youâ€™ll start making mortgage payments.
Many lenders will let you lock in the interest rate on your home loan for up to a year when youâ€™re building a home, Schachter said. Still, check with your lender about your mortgage APR to make sure youâ€™re not stuck with a higher interest rate if your new build takes several months and rates surge during that time.
What type of mortgage can you borrow?
Homebuyers can use any type of home loan to build a property that they would use to buy a traditional home, Schachter said. Among those loan types are:
- FHA loans: You can apply for an FHA construction loan to finance a new build. To qualify for an FHA loan, youâ€™ll need at least a 3.5% down payment, a minimum 580 credit score and proof of income. You may qualify for an FHA loan with a credit score lower than 580, but youâ€™ll need to make a down payment of 10% or higher. Lenders will also look at your debt-to-income ratio (the percentage of your monthly income that is dedicated to repaying debt, including your estimated mortgage payment). For example, if you have $3,000 in bills each month and your gross monthly income is $5,000, your DTI ratio is 60%. In most cases, lenders want you to keep your DTI ratio at or below 43%.
- Conventional loan: Requirements for a conventional mortgage can vary, although youâ€™ll typically need a credit score of 740 or higher to qualify for a loan with the best mortgage rate. Lenders also look at your employment history, income and DTI ratio.
- VA loans: Most lenders expect borrowers to have a minimum 620 credit score to qualify for a VA loan, though exceptions can be made for borrowers contributing a larger down payment. Youâ€™ll also need sufficient income and a valid Certificate of Eligibility (COE) based on your level of service. You must also plan to live in the home full time.
- Construction loans: Individuals building a custom home may need to get a special construction loan from a lender or bank. These loans cover the initial costs of building a house, including the lot, building materials and architect fees. Construction loans are typically short-term loans with variable interest rates that are good for less than a year, according to Schachter. Ultimately, construction loans are converted to permanent home loans once construction is complete.
The bottom line
Deciding to build your home can come with a heftier price tag than what it could cost you to buy an existing home.
While youâ€™ll reap the benefits of a newly constructed home, like brand-new appliances and major systems, the time it takes to complete your home can likely surpass the contract-to-close timeline on a home that already exists.
Before you make your final decision, be sure you understand the estimated costs of building a home â€” and make room in your budget for price fluctuations.