How Much Money Should I Save Before Building a House?

Building a house can be a challenging undertaking that requires plenty of planning and coordination between different parties. At the same time, it can be a great option if you hate the idea of spending endless weekends driving around and looking at houses that aren't what you want. Building can be more expensive, however, because you're paying not only for the house but for the labor to create it. You'll need enough savings to cover the costs, and a cushion in case your house goes over budget.

Some people build their own homes and pay the entire cost in cash, but they're the exception, not the rule. If you have the cash, however, this is a good option because you save money on financing costs. The amount you'll need to pay depends on the size and complexity of the home, as well as how desirable the area you want to live in is. As of 2019, the national median price per square foot was $150.

You can still get financing if you're building your own home, but you'll likely need to get it from your bank or credit union. One type of loan, a construction-to-permanent loan, is designed specifically for people building their own homes. If you don't get this type of loan, you'll instead have to take out separate construction and mortgage loans. The standard down payment for these loans is 20 percent of the home's total cost, but depending upon your credit score and income, you might be able to negotiate for a lower down payment. If you qualify for an FHA loan, you might only have to put down 3.5 percent.

Nothing ever goes completely as planned. You might hate the new bathroom or discover that laying tile is much more expensive than originally planned. Add a cushion to your budget that is equal to 10 percent to 20 percent of the total project cost so you can cover your expenses if you end up going over budget.

You'll have to pay homeowners insurance and property taxes on your home, and should get an estimate of these costs before you commit to buy. Depending upon your state and local regulations, you might also have to pay for a building permit, contribute to the costs of the builder's insurance or pay taxes on the items purchased to build your home.

If you can't easily cover the mortgage with your salary, you'll need to save up enough money to cover the mortgage for several years. It's also a good idea to have six to 12 months' worth of living expenses in an emergency fund. This can ensure that, should you build your dream home and then lose your job, you can still make your mortgage payments for several months while you find other work.