If you’re planning on becoming a homeowner right now, you may be feeling frustrated. Home prices are on the rise and available housing stock is getting snatched up every day.
That may leave you wondering if you’ll end up paying more for a house that isn’t even the home of your dreams.
What if – instead of buying someone else’s home – you could pick the perfect location and build the house of your dreams?
Building your own house is possible. And it can be affordable. You just have to go into it understanding all the pros and cons and potential costs before you commit.
| ✅ Pros | ? Cons |
| Yours to create and mold: Building a new home means that you have total control over everything, from the location to the floor plan to the type of knobs you put on your kitchen cabinets. |
Harder to borrow:
When you buy an existing home, the home can serve as collateral. If you borrow money to build a house, lenders consider it a higher risk because they can’t appraise the value of a house that doesn’t exist. This increased risk makes lenders more cautious, which makes it harder to qualify for a loan. This can lead to higher interest rates and down payment requirements. |
| Everything is shiny and new:
Unlike existing homes, which may be degrading because of normal wear and tear, a newly built home means everything from its foundations to the roof is brand new. That works out to lower maintenance costs in the long run. You also won’t have to worry about toxic materials like lead in the pipes or asbestos in the insulation. |
Less predictable costs: When you buy a home, you and the seller agree to a price, and what you pay is usually close to that price. When you build a house, you may receive an estimate, but there’s no guarantee that unforeseen problems or bad planning won’t make your costs go up before the home is complete. |
| Energy efficient: Building a new home lets you take advantage of the latest in green building materials, practices, technology and appliances and alternative energy sources to power your home for less. |
Added time and stress: Building a home from the ground up doesn’t happen overnight. Even with an experienced contractor and no major problems, a new home can take 7 – 12 months to build. You’ll have to troubleshoot problems with contractors, local government, Mother Nature and everything else that comes your way. |
When taking out a construction loan, build a contingency fund into your budget. Set aside 5% – 20% of the total budget to cover the additional cost of surprises.
Understanding Building Costs
First, let’s look at the overall cost to build a new home compared to the average price of existing homes sold, based on 2020 Census data on characteristics of new housing by contract price.
| Average contract price of a new, contractor-built, single-family home | Average sales price of single-family houses sold | |
| U.S. Average | $ 397,300 | $ 391,900 |
| Northeast | $ 547,800 | $ 617,300 |
| Midwest | $ 372,800 | $ 346,900 |
| South | $ 347,200 | $ 343,900 |
| West | $ 502,200 | $ 472,000 |
Keep in mind that these numbers include both the cost of the land and the cost of construction. So, while building your own house is slightly more expensive, it doesn’t have to be a dealbreaker.
There are a lot more variables involved when you’re building a house. That’s why it’s a good idea to understand all the different costs and how they can affect the construction process.
Location: Land of the Lots
Before you build your new home, you’ll need to find a place to put it.
Property lot prices can vary depending on local land values and the total square footage of the lot you purchase. That said, according to data from the National Association of Home Builders (NAHB), the cost of the lot for most new home projects can average around 20% of the project’s total budget (or $90,000 per home).
Of course, the costs connected to the location include more than the price of the lot itself. You’ll also need to take these expenses into account:
Site work
Before you can start laying the foundation for the home, you’ll need to clear the land of any existing structures, tree roots, large rocks and anything else that could interfere with construction. This can cost around $5,000 or more.
Utilities
If your land is near a local energy grid and water and sewer lines, you’ll need to pay for utility hookups. The cost can vary depending on where you live. It can cost anywhere from a few thousand to tens of thousands of dollars.
If you can’t connect through local utility companies, you may need to dig a well, install a septic tank or install solar cells or an alternative power system. All of this could cost tens of thousands of dollars.
Permits and impact fees
Even though you own the land, you’ll still have to get permission from your local government to build. Most new home projects require a building permit and an impact fee to cover the costs of new infrastructure to accommodate your new home. On average, these can cost $10,000.
Construction Costs: The Big Build
Design costs
If you want to build a custom home, you’ll need an architect to design the home for you. On average, this can cost $5,000. But the price can go even higher depending on how much you want to customize the home.
Many design websites and home builders allow you to select from a range of existing design plans, which can help you save money.
Many of these predesigned plans allow for some customization, so you can always adapt an existing plan to fit your needs. If you’re planning on building in a housing development, you’ll probably have to choose between a few preselected home styles.
Labor costs
Labor is one of the single largest costs for new home construction, usually making up 30% – 50% of the total cost. While labor costs can fluctuate depending on where you are and the overall economy, there has been a shortage of qualified contractors in recent years.
So, when you’re making your plans, be prepared to pay more or wait longer for skilled contractors, like plumbers and electricians, to become available.
Material costs
Recently, the cost of building materials has become one of the biggest issues in the construction industry. This especially applies to the concrete needed to build the foundations as well as the steel framing and the lumber needed to build the structural frames.
Steel and lumber prices spiked during the pandemic because of supply chain problems and labor shortages. While prices are returning to their pre-pandemic levels, wildfires in the Pacific Northwest have destroyed trees that could have produced billions in timber.
Variables that are outside of your control can make construction costs balloon. So, if you do decide to build a new house, talk to your contractor about how to get the best price for the materials you’ll need.
Finishing costs
While framing and foundations are important, it’s the finishes, like granite countertops or brick siding, that make all the difference in how your home looks – and how much it will eventually cost.
While costs can vary depending on the materials and brands that you choose, NAHB does provide some helpful pricing information:
- Exterior finishes: Exterior wall finishings, roofing, windows and doors
- NAHB average cost: around $40,000
- Interior finishes: Structural components, including insulation and drywall, aesthetic touches, like interior trims, paint, lighting, flooring and functional components, like cabinets, countertops and fixtures
- NAHB average cost: around $75,000
Financing: Finding the Money for Your New House
Most of us don’t have hundreds of thousands of dollars lying around to build a new home. To build a dream home, we would have to borrow money from a bank, credit union or other lender.
A regular mortgage won’t cut it for new-construction homes. You’ll have to consider one of these options:
Construction loans
Like most mortgage loans, a construction loan is a conventional loan. A key difference is that a construction loan allows you to borrow money in the short term, usually for a year, to finance the construction of your new home.
Once you’ve built your home, you can refinance the loan into a conventional mortgage.
To qualify for a construction loan, you’ll need to jump through a few more hoops than you would for a conventional mortgage. Lenders will want you to have a credit score of 680 or higher and expect you to make a 20% – 25% down payment.
They will also require that you work with a qualified home builder. The builder must be a licensed general contractor with a solid track record in homebuilding. So, if you were planning to build the home yourself – while that’s impressive – it won’t get you a loan.
Like most loans, your interest rate is based on the risk to the lender. So you can expect the interest rate for construction loans to be 1% higher on average than the rate on a conventional mortgage.
You’ll likely pay more in closing costs because there are more approvals and paperwork required to get a construction loan.
FHA construction loans
If your credit score is low or you’ve had credit issues in the past, you may be able to qualify for a construction loan through the Federal Housing Administration (FHA).
These loans are similar to conventional construction loans, but they’re government-backed, so lenders will accept credit scores as low as 580.
FHA loans come with limits on the size and cost of the home you plan to build. They also require more paperwork and the application process takes more time to complete.
One benefit of FHA construction loans is that they allow you to get the construction loan and mortgage at the same time, so you don’t have to worry about refinancing once the house has been built.
VA construction loans
If you’re an active duty service member or veteran of the U.S. armed forces, you can qualify for a construction loan through the Department of Veterans Affairs (VA).
Like FHA loans, VA loans are subject to federal limits on how much you can borrow. You’ll have to complete a more involved application process. And you must build the house with a VA-qualified builder.
To help you sort through these different types of construction loans, here’s a quick comparison table:
| Construction Loan Type | Average Loan Financing (Based on U.S. census data) |
Minimum Credit Score (required/preferred) |
| Construction Loan | $359,600 | 620/680 |
| FHA Loan | $234,300 | 580/640 |
| VA Loan | $339,100 | None/620 |
Building a Home on a Budget
While the costs of building a home can be both expensive and extensive, there are ways to keep the costs under control.
Don’t go crazy with customization
While you should want a home that truly feels like it’s yours, be careful about going overboard with a custom design.
A home built using a proven design template is going to be easier to build than a home built from a brand-new design. While builders can offer some level of customization, working from a proven template makes it easier for them to plan, order materials and get the job done.
Go prefab
While prefabricated (aka “prefab”) or modular homes get a bad rap, the industry has grown and innovated enormously.
Prefab homes come in all kinds of styles. And because all the components are assembled in a factory and then assembled on-site, prefab homes can save you big on time and labor and are often more energy efficient.
The biggest challenge with prefab homes is making sure that the house will fit your lot and that you’ll be able to connect the home to existing water and utility lines.
Think tiny
Another possibility for those who want to own their own house, but don’t want to feel anchored, is a tiny home. These are small houses (400 square feet or less) that are designed to be eco-friendly.
They can either be put on wheels for easy transportation from site to site or connected to existing water and power grids. Just keep in mind that a tiny house usually doesn’t have a foundation, so it will lack the solidity and permanence of a constructed home.
To Build or Not To Build?
Building your own house is an exciting proposition, one that can end with you owning the home of your dreams. The challenge? Making sure that you account for all the costs and get the right financing so your dream home doesn’t turn into a money pit.