What to consider when buying and financing a new construction home
Many homebuyers wonder if they'd be happier building a new house in a planned community rather than competing for existing homes when housing inventory is low.
Part of the answer depends on how long you can wait until you need to move. With a new construction home, the buildout can take at least four to six months to complete — a timeframe that stretched to 10-13 months with labor and supply chain slowdowns over the past few years.
That means the financing is going to take longer too. Luckily, those delays are quickly starting to dissipate.
Are we talking about custom construction?
To be clear, this blog isn't addressing custom construction, which is working with an architect and construction company to design and build your home on private property. We're talking about a large-scale construction project where a home builder takes a sizeable piece of land and divides it into smaller lots to build multiple new homes.
Also called "sub-divisions," new home construction projects might be communities of single-family homes, attached townhouse homes or even condominiums — sometimes they’re referred to as "production homes." Community amenities are often available — like a pool, clubhouse or even on-site daycare.
Buyers of new home construction will typically get a few floorplans to choose from and a list of optional upgrades — like flooring, cabinetry, lighting, countertops or even the reconfiguration of a wall. Upgrading is as close to a custom build as you can get with going full custom.
Is a new home construction right for you?
The best way to get started is by exploring new construction communities in the region you're interested in living. Here's a quick checklist!
- See a newly constructed community in the works? Stop in. They usually have a model home open to entice buyers and can supply you with information on what features and amenities the finished community will offer.
- Many are developed on the outskirts of town due to the high cost of land in urban and suburban areas. This could lead to longer commutes or limited access to schools, shopping, dining and recreation.
- Don’t expect mature landscaping. If you're looking for old-growth trees on your property, new-construction communities may not be for you.
- Many have a homeowner association (HOA) to manage community amenities and enforce rules that help maintain the properties.
If you're okay with all of this, newly built construction homes might be a great fit!
Prepping to talk about financing
Our first suggestion is to chat with a mortgage loan originator with knowledge of the area you're looking to live in. They'll help you determine what you can afford, so you'll know your best loan options and what kind of homes and amenities you can consider. They might even hook you up with reputable local builders they work with to get you started. Here's how to get ready for that discussion:
1 - Get a general idea of what you can afford
- Start playing with online affordability calculators that lenders and builders have on their websites — ours is here. These tools evaluate your credit score, income and debt to give you a rough idea of how much money you can borrow, what interest rate you might qualify for and how long you'll have to repay the loan. Later, your lender will give you a more accurate read of what you can comfortably afford.
2 - Pull together your credit information
- If your bank doesn't provide a credit report, order one from the three credit bureaus (Experian, Equifax and TransUnion). Then check for inaccuracies or outdated info. Fixing these can improve your credit score and affect the rate your lender eventually offers you.
- Meanwhile, gather documentation of your income, employment, two years of IRS filings (if you're self-employed), bank account statements, 401(k) funds and other financial information.
- It's also a good idea to list your household operating expenses, outstanding loans, alimony (coming or going) and anticipated expenses (like sending kids to college). These will impact the mortgage amount you qualify for and the max price you can finance.
3 - Get pre-approved for a loan
- Before getting too far along, you’ll want to get pre-approved for your mortgage. An underwriter who works with your loan officer will review your information, assess your creditworthiness, run all the numbers and issue a pre-approval letter.
- Your pre-approval letter specifies the amount the lender is willing to loan you and demonstrates your seriousness as a buyer when negotiating with builders.
How does a mortgage for new home construction work?
Buying a new construction home is just like buying an existing single-family house or condo, except that the seller is not the former owner; it's the builder. Other than that, the transaction is pretty much the same.
- Your lender pre-approves you with a specific home-buying budget.
- You select the builder you want to work with and choose your location within the development and the floorplan you're happiest with.
- You go into contract with the builder. In this case you don't usually make an offer, the builder typically sets the price.
- Then you go to the builder's "design center" where they present the various grades of flooring, lighting, backsplashes, kitchen and bathroom hardware, etc. Of course, if the upgrades are not in your budget, don't feel obligated. Remember, upgrades are on top of the base price you're paying for the home to be built. If you go over the home-buying budget you were pre-approved for, you either need to dial it back a bit or dial your lender.
The rest of the purchase will feel the same as a regular home purchase — with the following exception.
- Most home purchases typically take 45-60 days from when your offer is accepted to when you close on the home and get the keys. With new home construction, the time between going into contract and closing day can be months. So here, it's like a normal home financing transaction with a longer-than-normal escrow period.
Wait, what is escrow?
In real estate, an escrow period provides security to both the buyer and the seller and helps ensure a smooth transaction. It does this by having a neutral third party hold onto the money related to buying the newly constructed home until both the buyer and seller fulfill their obligations.
In this case, this is however long it takes for the home to be built. Once that's done, the closing takes place, the funds are transferred to pay the builder, and the buyer gets the keys.
Should I get an inspection before closing?
Absolutely! Some people think they don't need a home inspection when buying a brand-new house. And while it's not required, we recommend having one anyway. Here's why:
- Mistakes happen: A home inspection is like a safety net to make sure everything is in proper working order, from the foundation to the electrical and plumbing systems. And even though the house is new, there might be hidden issues that only a trained eye might notice. An inspection can spot poor insulation, ventilation problems, or water drips that could cause trouble after you move in.
- Quality and safety: By getting an inspection, you can ensure the builders followed all the necessary codes and standards. You want to be confident that your new home is safe and built well. You'll be happy you did this if you ever decide to sell.
- Warranty coverage: Many new homes come with warranties from the builder or manufacturer. With an inspection, you can document any problems before the closing and get them fixed under warranty, so you won't have to deal with them later.
An inspection might cost a few hundred dollars, but if it reveals any issues, you can use that information to negotiate with the builder and ask for repairs or concessions before finalizing the sale.
Which mortgages are best for new home construction?
Traditional mortgage lenders offer a variety of loan programs specifically designed for buyers in new construction communities.
The Fannie Mae HomeReady loan is a great choice. It's also worth considering loans backed by the government, like those insured by the Federal Housing Administration (FHA Loans) or guaranteed by the Department of Veterans Affairs (VA Loans), if you meet the eligibility requirements.
Important: lock in your interest rate
A noteworthy feature of Movement's new construction loan is the interest rate lock option. By offering qualified borrowers rate locks for up to 360 days*, you and your family can enjoy peace of mind during the construction phase.
*Offered on select conventional conforming, FHA or VA fixed rate loan products. Extended Rate Lock pricing is based on current 60-day pricing plus the appropriate rate add-on: 360-days (0.375% add-on to rate). An upfront fee that is based on a percentage of the loan amount will be required within 48 hours of the lock request to secure your interest rate and long term lock period: 360-days (2.125%)
Remember, building a home can span several months. Given the daily fluctuations in interest rates, having a rate locked in place ensures that the interest rate you agreed to when you initially signed up to build your home remains unchanged by the time construction is completed and you're ready to move in.
"When it comes to new construction lending, we often get questions about the extended escrow process and how it affects interest rates," said Chris Conlon, a Movement Mortgage Regional Builder Manager with Movement, based out of Southern California. "With our long-term lock options, Movement offers a way to shield borrowers from potential rate increases. And if the market conditions favor a decrease, we also provide the flexibility to adjust rates down."
When in the development cycle should you buy?
Buying early could save you $$:
- Getting in when the builders first open the gates can sometimes snag you lower introductory prices. It can be challenging, though, to secure top locations as premium lots tend to be reserved for later stages. Additionally, minor design flaws or issues may emerge during the initial construction phase, but these concerns are usually quickly addressed.
- Also, early buyers should research the builder's track record in fulfilling their promises and maintaining the development's integrity. While you may enjoy exclusive access to amenities before your neighbors move in, you may also have to deal with months of construction noise.
Mid-stage buyers tend to pay more:
- Prices tend to go up as sales momentum takes hold. That’s because buying later in the process offers advantages such as a more fully developed community with finished amenities, reduced construction noise, more established landscaping and well paved roads. Plus, by mid-stage, builders have worked out many of the kinks that earlier buyers may have faced.
- Also, as development continues, units with better views or locations will become available and be priced accordingly (i.e., higher than standard units).
There are also advantages to buying later on:
- Builders often provide enticing pricing incentives towards the end of a project to boost sales so they can wrap things up and move on to the next development.
- Just be aware that, in some cases, latecomers may also experience fewer options for customization since available lots and some upgrades could be limited.
Ready to build?
When financing your newly constructed home, you'll want a mortgage lender who understands the ins and outs of getting those loans approved and closed with no hitches. Look no further than Movement Mortgage! We've got specialized new construction loans that are perfect for buyers who want to build a dream home instead of buying a pre-owned one.