Building your own home can be a rewarding experience. It may also be one of the hardest things you've ever done. Approaching the project with an understanding of the pitfalls can help you get through it. Caution is particularly important when doing this without a cash reserve. If you run out of money in the middle of the project, you can lose the building lot, the building in progress, tens of thousands of dollars and months of hard work.
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Problems of No-Down-Payment Construction Projects
Experienced home builders typically recommend against building a home when your resources are less than 5 percent of projected costs. In most cases, you'll have to buy the lot first, then come up with money for construction. That two loans are normally required imposes an additional obstacle when you lack money for a down payment.
Although you can save money by eliminating a building contractor, this too has a couple of downsides. First-time home builders commonly underestimate the difficulties and over-run their budgets. If you're planning to build it yourself, note that few lenders will fund construction, even construction in progress, unless the builder is a licensed contractor.
If you own the lot you intend to build on, once the lot is professionally appraised, a lender counts your equity in the lot as your down payment. With a Fannie Mae 97 percent loan program, your lot value need be no more than 3 percent of the loan.
Occasionally you may find the owner of a building lot sufficiently motivated to sell that he agrees to finance the lot sale himself. This can certainly help you get your project started, and if the lot owner agrees to subordinate his ownership to your lender, this become an effective substitute for the down payment you don't have. It may take some patience and diplomacy to get the lot owner to agree to subordinate, but one way of presenting it is that you're constructing a growing asset — your house — on what remains his property in the event of your default.
Restraint and the Long View
Approach the building process with modest goals. Residential construction costs vary widely, but for other than expensive coastal areas construction costs run around $86 per square foot, according to a 2017 National Association of Home Builders survey. Instead of building a 2,776-square-foot house, the average size of new residential construction in 2017, build an 800-square-foot house. A growing "tiny house" movement proposes building houses even smaller. The decision to build far smaller than the national average can reduce your construction costs by two-thirds or more.
One way of building a new house without money down is to invest "sweat equity" in the project. This requires patience and careful planning, but it can be done.
The first step is either owning the lot or striking a deal with the lot owner. If you do the latter, invest a few hundred dollars in a good real estate attorney who can write up a document that protects both you and the lot owner.
The next step is planning the construction. Hire an experienced designer with a good reputation to design your house. Architects cost a minimum of 10 percent of the projected building cost, but planners can come up with buildable plans for as little as $1,500. Run your plans by your local building department and get approval before beginning — this is essential.
Begin construction by making a contract with a foundation specialist. Be frank about your financial situation before he begins and be clear that you'll be financing the construction out of your income until you get a loan.
Once the foundation is completed or well underway, you can apply for a 3-percent-down construction loan through Fannie Mae. Your foundation becomes your down payment.