New Home Construction Advantage
New home construction, encompassing the process of planning for a brand-new home, ushers’ homebuyers into a realm of exciting possibilities. The advantage of new home construction versus an existing home (often referred to as a resale-home) can be compared to choosing between a new and used car purchase. The new car comes with the buyer’s choice of features, upgrades, and colors, and that distinctive “new car” smell. On the other hand, the used car, reflects the previous owners’ tastes and probably has some worn upholstery and perhaps a dent in the side from a fender-bender accident. The new car may cost a bit more, but it is more fuel-efficient, comes with a warranty, and it looks good! If you have the money, which would you choose?
Affordability: New Home Construction
First, we want to remind you that you are in charge of your financial decisions. If financing your purchase, it is important to understand, the lender you select is NOT a financial planner. Some lenders may not be interested in setting up a mortgage that works for your particular budget. In fact, it is not uncommon for a lender to approve a bigger loan than some should take on.
We want to encourage you to determine what you are willing to spend on a monthly basis. It is important to tick with that number. Once you know that number, using the current interest rates, your lender can calculate a price range that works for you. If you take on a mortgage beyond your budget, you may have little to no extra money to do the extra things you want to do in life.
28/36 Percent Rule of Thumb – New Home Construction Planning
PITI: (Principle, Interest, Taxes, and Mortgage Insurance)
Ideally, your PITI, or your housing expenses should be less than or equal to 25% to 28% of monthly gross income. Lenders call this the “front-end” ratio.
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$100,000 X .25 (25%) = $25,000 then $25,000 ÷ 12 = $2,083 would be the maximum monthly housing costs
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$100,000 X .28 (28%) = $28,000 then $25,000 ÷ 12 = $2,333 would be the maximum monthly housing costs
Lenders usually require housing expenses plus long-term debt to less than or equal to 33% or 36% of monthly gross income. Lenders call this the “back-end ratio.”
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$10,000 X 33% = $3,300 – maximum total debt
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$10,000 X 36% = $3,600 – maximum total debt
New Construction & Proposed Multifamily Projects 2Q23 – Source: Berkadia
