How to Budget For a New Home

Remember from science class that three elements must be present to start a fire: fuel, oxygen, and spark? If one of these elements is missing, nothing will happen.

Similarly, three things must happen in order to build your new home: finances must be made available, land must be purchased, and a house design must be finalized. The graph below illustrates how the maximum budget is broken down into individual components.

Figuring out financing and setting the maximum budget is ideally the first step because all future decisions depend on the maximum budget, and your maximum budget is rigid. It does not increase to meet the cost of design and land; rather, land and design are chosen in order to stay within the limitation of the budget. The maximum budget is comprised of any cash you will directly contribute to the project, as well as any financing you will obtain.

Second, I recommend determining how the budget will be divided between land and design. For example, if you have a total budget of $500,000, you could divide the money to spend $100,000 on land and $400,000 on design. Or you could spend $200,000 on land and $300,000 on design. You could even opt to not use your entire budget, instead purchasing land for $100,000 and designing a home that will cost $300,000 to build.

Since the next most limiting factor after budget is land, I recommend investigating your options and setting a realistic budget for the land that will leave you enough to build your home. The cost of land must factor in the sale price for the land, the cost of surveys, and any improvements to the land that will be necessary to build, such as water/sewer connection, well and septic systems, driveways, etc. Each lot is different, ask your builder to provide you with a cost estimate of these improvements.

Finding land doesn’t necessarily have to precede the design process. You can begin designing your home while looking for a lot that will match your expectations and budget. However, if views and orientation of your home are highly important to you, it is best to find the land first and then design a home to take advantage of the site’s best features.

The remainder of your budget will be allocated to your actual home. There is a lot of flexibility in design, both in terms of square footage and level of finish which can be manipulated in order to get the most home for the money. Over the years we have found that people tend to be happier if they direct their budget towards the better finishes and functionality of their home rather than focusing merely on square footage.

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