Build a Home on Your Farm, Part 5 - The Step-By-Step Process for Construction
This is a 5-part series of articles that discuss building a house on your farm or homestead. We look at planning, budgeting, designing, building, and we share our lessons learned along the way. In Part 1 we explore why to consider building a home on your farm. In Part 2 we discuss different types of homes you may want to build. Part 3 goes into site planning and home design. We'll discuss the people you work with to help build your home in Part 4. And finally the step-by-step process is explained in Part 5.
You've decided on the land, the design of the house, and you know all the people you will work with. Now it's time to get down to business and get this home built. As mentioned in Part 4 of this series, we are treating these articles like a letter we wish we could send back in time to ourselves, to help provide clarity on the tasks ahead. In this article we explain the actual step-by-step process as it was revealed to us over the course of several months. Let's begin with what you need on hand to get started.
This should be obvious, right? We'll get into the dollars and cents some other time, but plan to pay some money down toward your land and new home. Likewise, since you are building this house as part of a farm you should plan for there to be a significant amount of non-loan upfront expense associated with the farm operation. This may include building and repairing infrastructure like fences, water lines, or barns. Also, clearing and improving land will take money. If your farm is already established, this may not be as big of a concern, but you should plan for it regardless.
As for a down payment, the typical amount paid is 20% of the final cost. There are options that allow for the borrower to pay less than 20%, like VA loans, but we strongly advise 20% or more for your down payment. This increases the odds of getting approved for the loan, gives you justification to negotiate for better interest rates, reduces your monthly mortgage payment, and keeps you from having to pay for private mortgage insurance, which is normally required for loans with less than 20% paid down.
You can't just build a home anywhere without a title to the land. Plus, the utility companies will want to know you own the land or have a contract to buy the land before they agree to hook you up to power and water.
This goes hand-in-hand with the deed or title. You may have to have a survey accomplished, but the lender will need this.
Proof of Income, Personal Identification.
A lender will want all sorts of information from you, mainly your proof of income and evidence of financial assets. Have ready to go your last couple of tax returns, W2s, pay stubs over the past 2-3 months, bank statements for your checking and savings accounts, and money invested. And of course your standard identification requirements such as drivers licenses and social security cards.
Okay, now let's get into the process itself. This list is not necessarily sequential. Some of these steps can be done in any order, and some will be done simultaneously with other steps in the process.
As far as we're concerned, this is the only step that has to be done in this order: first! Having a budget and fully understanding what expenses to expect as well as your financial boundaries will keep you from getting in over your head. You need to know your no-kidding, this-is-the-max-we-will-spend amount on a mortgage. You will take your home plans to your contractor who will in turn give you an estimated budget for building your house. Most contractors are going to fudge the numbers high because they don't want to go over budget during construction. Going over budget means stopping work and you going back to the bank to request an increase to the loan amount. With that said, we recommend treating the estimated budget as if it is exact. Once you factor in land cost and your down payment, can you pay a monthly mortgage for that amount?
Remember it's not just the house you're paying for. There will be other expenses to factor in. Some may be included in the mortgage, and some will need to be paid for up front. Here's a list of significant expense from our experience.
Water meter hookup.
Running over 1,000 feet of PVC from water meter to house site.
And plan for what we in the military call "creep." Little things, little expenses that keep getting added in along the way. They don't seem big at first, but over time they creep up on you in the form of a big financial monster.
Note: In the spirit of budgets, make sure you allow yourself an ample time budget. I won't say Murphy's Law is the norm (anything that can go wrong, will go wrong), but you can expect to deal with delays of some variety despite your best plans. For example, we were just about to get going with the loan process when COVID-19 started spreading and shutting down the economy. Construction loans ground to a near halt for a couple of months.
2. Find your land.
Okay, admittedly this is obvious. But it's worth emphasizing to not get the proverbial cart before the horse. If the intention is to have a house on your farm, the priority should be finding the right land for your farm. Of course it's okay if you just want some land out in the country for a home, but you don't want to pick a property with a future home at the forefront of your thoughts and end up getting land that is not ideal for your farming pursuits. List out your priorities for a property and your farm, and let that guide you in your search for land.
Here is one of the major areas where road maps for building a home will diverge into different paths. You may decide to buy the land first with the intent to build a home later. Or you may have the intent to build in conjunction with the purchase of the property. We did a one-time close construction loan where we sought a single loan to both buy the land and fund the construction of a home. When it comes to farm homes, this is probably the lesser pursued of the two options. One-time close loans are common in new subdivisions, and in our case we were familiar with the land and knew we wanted to build on it. The advantage of a one-time close is there is only one round of closing costs associated with a real estate purchase. Likewise the interest rate is usually lower than if you bought land first (land-only loans typically have higher interest rates due to a perceived higher risk for the lender).
But don't rush the process to save money with a one-time close loan. Better to be comfortable with the land and where you want to have a home built on the property as opposed to ending up with something you don't enjoy.
A survey of the property is needed in order to proceed with plans and will be needed before appraisal and final approval of your loan. If there's not a survey available the title company can recommend different surveyors to complete this task. Find out if the survey must be paid for up front or if it will be rolled in with the loan.
4. Get an Address.
You need an established address on file for tax purposes, mail, and emergency services. Contact your local county tax assessor to request a 9-1-1 address be established.
Then go to the local post office to inform them of the address and arrange for mail delivery. They may not deliver mail until you've actually moved in to the property.
5. Get pre-approval from your lender.
A contractor is not likely to work with you on plans to build without you being pre-approved by a lender. As mentioned previously, be prepared to provide all sorts of banking statements and other financial information to the lender in order to get this rolling. Final approval will come after the plans for the home are finalized, a contract signed between you and your builder, and an appraisal completed.
Getting pre-approved could be toward the top of this checklist, it just depends on how you approach the process. Remember, many of these steps are done in conjunction with each other.
6. Design Your Floor Plan.
Yep, this is the fun part. While you can buy "off-the-shelf" design plans, you will be wise to involve an architect in the process. An architect can help you design something from scratch or take other plans and modify them to meet your needs and preferences.
We actually had two iterations of working with architects. We bought one of those off-the-shelf plans and worked with an architect friend of ours to make some changes to them. It was great, but after several delays to getting the construction process going and some financial soul-searching along the way, we realized the plans we came up with were too much and drove far too high of a cost. Our desire was to simplify and downsize, but we weren't really doing that with the design we came up with. So we scrapped those plans, and in the interest of expediting the process we worked with our contractor's architect to design something nearly from scratch (spoiler alert, our plans our based off a floor plan for a mobile home, and we love it!).
Like looking for land, take some time to really think through what you need and what you want in a home. Set your limits in both size of home and finances, and let those be your guideposts.
You need to specify the materials your house will be made of so that the contractor can provide a budget estimate for the project. This includes the house exterior, roof material, types of windows, flooring, counter tops, cabinets, light fixtures, and so on. The architect may be able to call out all the materials in the plans he or she comes up with, but you may find, like we did, the architects have a mind for aesthetics and flow, not necessarily for the most cost effective options. Discuss with your contractor along the way. A good contractor will advise you on costs, what is cheap, and what is cost effective.
8. Construction Estimate and Contract.
The builder will go over the plans and provide you and the lender with an estimated budget to build your home. This process will vary depending on your contractor. Once you have an estimate your builder will want to sign a construction contract with you. The contract outlines the estimated expenses, the timeline, the builder's responsibilities as well as yours.
The contract should explain how "draws" are conducted. Remember, draws are how a contractor pays for different phases of the construction. He or she will draw a certain amount of funds from the lender in order to pay for materials and work along the way. The signed contract will be sent to the lender.
A contractor needs to remain on or under budget in the process. Failure to do so requires you to seek changes to the loan, and the lender will not be keen on that. Again, that's why the construction budget will likely be a little high - it gives the contractor flexibility without you having to go back to the bank. But it is important that you establish how excess funds are handled. For example, if the budget calls for $20,000 to build the roof and the actual expense is only $18,000, what then comes of the excess $2,000? The truth is some contractors are not transparent about the expenses and will pocket any excess money. Our builder showed us the expenses along the way, and allowed us to make minor changes that would decrease the price. In our contract it explains that surplus money is credited back to us, and also anything that went over budget we were expected to pay for out of pocket.
8.a. Soil Sample.
Your contractor will need to have soil samples from the build site analyzed. This is needed in order to determine the foundation requirements, which will affect the cost to build. The soil sample and analysis will be arranged by your builder.
9. Builders Risk Policy.
Before the lender will approve your loan they need you to initiate a builders risk insurance policy. This is a type of insurance that covers buildings and associated property while under construction. Property losses due to natural events as well as theft or vandalism are covered in these policies, and they remain in effect until the house is ready for move-in. Ask your lender when they want you to initiate the policy.
Once your lender has the construction contract, they will order an appraisal. The appraiser will look over the house plans, the construction contract, and assess the property in order to report back to the lender what the final appraised value of the home will be. The appraiser may reach out to you to ask questions about the home plans and get access to the property.
11. Clear Home Site.
This may not be necessary for you, but it was for us. We hired a local bulldozer operator to clean out the area for our home and an easement for a power line.
12. Connect to Electricity and Water.
Your contractor needs electricity and water in order to start building. So if there are not already established connections on your property, you'll need to get hooked up to these utilities as soon as you can in the process. The builder may be able to use a generator and truck in water, but that expense will be passed along to you.
Contact your utility companies to determine requirements for connecting to them. The utility companies may requirement an easement so they can access and maintain the connections. Keep that in mind if you're clearing your home site and make sure the easement requirements are met. The cost to connect to the utilities will most likely be an out-of-pocket expense and not rolled into the loan.
13. Final Approval and Closing.
Once the lender has the appraisal back to them along with current bank statements and other financial records from you, they will then review the request for the loan and decide whether to approve or not. (We're going to assume if you've made it this far you're getting approved.) Once approved they will set up a time to close on the loan with you.
There will be terms that outline what you pay during the construction process and the limits to the timeline for building. You should expect to pay an interest-only payment during the construction. There is no principal payment while the house is being built.
Once you are approved the lender will work the title company to arrange the closing. Ask the title company representative about instructions for wiring funds or paying with a cashiers check for your down payment. And find out any other instructions on what to bring to closing, like multiple forms of identification.
14. Break Ground!
Congratulations! After you've closed on the loan the contractor can begin work. Stay in contact with your builder throughout the process, and be available at the build site to inspect work and answer questions the contractor or sub-contractors may have along the way.
There are lots of moving pieces when it comes to building a home, especially one on your farm. Do your homework beforehand, ensure you have ample money on hand, find a team you are comfortable to work with, and enjoy the process. We hope this helps shed some light on what you should expect. We would love to hear back from you on your experiences and anything we may have missed. Good luck!