Interest Reserves and Contingency Funds......Factors some inexperienced builders may not understand. Interest reserve and contingency funds need to be added into the cost of building your new home.

Lending requirements are a little harder these days and in some cases depending on your qualifications, banks will want you to have at least 6 times your monthly mortgage payment in your bank account to start your build. Based on your qualifications, it may still be possible to find a bank that will allow you to do an interest reserve. A reserve amount is added to your loan to make the monthly payment on your loan. This will increase the amount of your final loan.

In addition to interest reserve, contingency funds are also added to the loan amount just in case you need extra money to build your new home. Cost overruns or unexpected expenses are a part of building a house. The bank adds 5% to 10% of the cost breakdown and adds this amount to the loan amount just in case you have change orders, cost over runs or need better appliances. If you don't need or use this extra contingency fund then it will not be added to your mortgage upon completion of your new home.

Log in next week for Step 4!