4 Things to Know About Custom Home Loans in Today’s Housing Market

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4 Things to Know About Custom Home Loans in Today’s Housing Market

April 28, 2022

It’s no secret that the home building and buying market is facing unique, challenging times. Inventory to buy new and existing homes is low, builders are busy, and materials have higher prices and long lead times. If you’re buying a custom home, you’re less concerned about inventory, but prices, and their effect on your loan, can impact what and how you build.

Here are a few things to keep in mind as you consider your budget and your financing approaches for a custom home in 2022.

Custom Home Builder in Sequim | Estes Builders


#1 Design for Your Budget

With volatile material prices and supply chain constraints, it’s important to make design decisions as early as possible so your builder can lock in pricing ahead of time. Changes down the road can be costly—and the products you now want may not be available when needed—so be sure to weigh your options during the design stage.

Working with a design/build company like Estes Builders makes this process easier. Estes’ design process keeps you informed every step of the way. Each design decision—from square footage to the style of countertops—impacts the bottom line. That awareness ensures you can stay within your comfort zone. More importantly, it helps you stay within the loan for which you have been approved.

Estes Builders’ design/build process couples with a Guaranteed Fixed Price to provide a level of assurance that you won’t have to worry about the impact of material price changes and other obstacles during the months when your home is being built.

Custom Home Builder in Port Hadlock | Estes Builders


#2 Remember Contingencies

As you’re calculating what you can pay on a mortgage and how much loan you need, it’s important to remember that many lenders require a contingency of anywhere from 3% to 10% to cushion against the unexpected. So when planning payments on a million-dollar loan, keep in mind that a small percentage of it does not factor into the purchase price considerations.

With Estes’ Guaranteed Fixed Price, buyers don’t typically have to dip into the contingency, but it will still be required by your lender.

Custom Home Builder in Sequim | Estes Builders


#3 Understand How Appraisals Factor Into Loans

Construction loans, used for custom homes, are a little different than traditional new-home loans. Because you’re essentially taking out a loan on something that doesn’t yet exist, construction loans require a larger down payment, usually a minimum of 20%. But you also have to factor in the appraisal. If the appraisal comes in higher than the estimated total project costs, you might have a lower down payment; if the appraisal comes in lower, a larger down payment will be required. For example, if you put 20% down on a $1 million house, the bank loan is $800,000; if the appraisal comes in at $900,000, the buyer needs to make up the difference with another $100,000 down.

This is a concern with custom homes because appraisers don’t always have realistic comparables nearby. A custom home may be on a property near older homes that were built under different codes and energy requirements, so your appraisal may come in lower than it should.

Custom Home Builder in Port Hadlock | Estes Builders


#4 Remember What Loans Don’t Account For

Lenders care about what the home would resell for tomorrow. They use comparable appraisals that compare your new construction with sales of used homes in your neighborhood. So the hidden costs that come with building a home may add more to your required down payment.

Washington state’s taxes are one of those factors. Builders have to pay sales tax not only on materials but also labor. If you’re moving from out of state, our 9%+ tax—which is nearly $100,000 in taxes on a $1 million loan—can bring a bit of sticker shock. And it’s also something that doesn’t show on the resale of a used home, so a comparable appraisal won’t include sales tax spent at construction.

This also goes for decisions that impact the price but not the appraisal. For example, situating the house on a more difficult area of the property could add tremendous cost but not show up on an appraisal and therefore not be covered by the loan.

Custom Home Builder in Kingston | Estes Builders

These are the types of things Estes can help you with as you navigate the home-building process before and during construction. We work with buyers to put together the right information for the bank and the appraiser, including 3D color drawings that truly show the home’s unique features so they can understand the vision and value it appropriately.

A good builder also can provide insight into how their recently completed homes are appraising compared to the cost to build. For example, Estes’ appraisals have been coming in on target or slightly higher, which is a sign that we’re budgeting properly for the current market conditions.

In addition, ask how homes are appraising compared to the initial bid price. Some builders may claim a project costs less, but the costs go up as the project gets underway. With Estes’ Guaranteed Fixed Price, buyers know exactly what they’re going to be spending when they sign the contract.

Learn more about our Guaranteed Fixed Price.