How many times have you viewed a “move-in ready” home only to find more than a few things you’d want to change? Being less than impressed with resale homes might have you seriously thinking about a new construction home. The appeal of getting everything brand new is a big incentive to look into the process. We’ve gathered some of the more common questions so that you can decide whether building is right for you.
1. What are the different types of new construction homes?
In general, the three main types of new construction homes are custom, semi-custom, and spec. A custom home allows you to design down to every last detail, working closely with an architect. A semi-custom home is a pre-designed home that has aspects you can customize to fit your preferences. A spec home is designed by a builder with features that try to appeal to the widest range of consumers. Finishes such as flooring, countertops, and cabinetry are already chosen for spec homes, except in some instances where the timing of purchase allows a change.
2. Should I use a Realtor when buying new construction?
The short answer is “Absolutely, yes.” Many people have the notion that using their own Realtor to buy a new construction home will increase their cost—in most cases, it doesn’t. Builders include agent commission in their marketing costs whether you have an agent or not. By relying on the builder’s Realtor for all your new construction advice, you’re missing out on having someone represent your best interests. While the builder’s Realtor may seem very helpful, he or she is representing the builder at all times, not you. Choose a Realtor with solid experience in working with new construction homes. Bring him with you on the very first visit to any new construction sales office or model home to ensure proper representation.
3. Do I need an attorney for a new construction contract?
While you can get through the process without an attorney, in many cases, we recommend that you do have one review the contract. Every builder has their own unique contract, so don’t assume they will read like a standard Realtor’s contract. There are critical points in the process where you’ll want to be sure the contract works fairly in your interests. For example, what are your cancellation rights, what is your liability, and how will you be compensated if the timeline extends far beyond the deadline? What is missing from the contract that you haven’t thought of, such as, what happens if the price is more than the appraised value? Are you legally bound to make up the difference? Also, builder’s contracts typically don’t mention inspections, so it’s important to ensure your right in the contract to your own inspection and remedial action if something is wrong. An attorney can also review the warranty to ensure you’re protected in the event of defects found after closing.
4. How is a new construction home financed?
There are several ways to configure loans for new construction homes. Some use three separate loans: one to buy the land, one to build the home, and one to convert the construction costs into a permanent mortgage. Sometimes you can consolidate these steps if the builder covers the construction costs until you get the standard mortgage for payoff. Some lenders will use one loan for the entire process. Realize that whatever way you choose, you’ll likely need to put down a minimum of 5% of the purchase price (some loans are as little as 3%).
5. Is the mortgage process different for new construction homes?
The process for getting a mortgage for new construction is nearly the same as for a resale home. The biggest difference is the closing. A lender can’t close on a home until it is move-in ready. Locking in a specific rate for a mortgage can be tricky if the construction timeline gets delayed. Rate-lock windows usually last around three months. Work with a lender who can advise you on the best time to start your loan application.
6. Do you have to use the builder’s lender?
No. The builder might make it sound like you must use their lender. That’s because the arrangement they have with their lender suits the builder’s interests. You should always shop around to find the lender that best fits your individual needs.
7. What if the builder offers financial incentives to use their lender? Are they as good as they sound?
Probably not. Most often these incentives are more beneficial in theory than in practice. Whatever seller’s credit they may offer you can quickly be negated with extremely high lender fees and higher interest rates.
8. What is a builder’s “lender trap”?
Beware of builders that say there is only one way out of not using their preferred lender: getting a commitment letter to finance up to a year in advance of closing. No lender will agree to this and builders know it. Therefore, a buyer is trapped into using a builder’s lender. This begs the question whether you are using a reputable builder.
9. Can I negotiate with a builder on purchase price?
It is very difficult to get a builder to budge on purchase price. But that doesn’t mean your Realtor can’t try. One way you’re likely to save money is to negotiate on upgrades. Some builders will agree to as much as $10,000 in upgrades.
10. What is a Certificate of Occupancy?
This certificate states that your home meets local building and safety codes. It is a necessary step to close on your loan and for the local government to approve the home as ready for move in.
11. Why would I need an inspection on a brand new home?
We strongly recommend that you do hire your own inspector. Sometimes quite costly mistakes are made, ones that will cause water leakage in your home a year later, or foundation cracks over time, or plumbing problems when you move in. A builder might say it’s not worth your expense since they have ample supervisors as well as county inspectors who are already required to check their work. But there are many examples why these checkpoints aren’t sufficient. An inspection is equally important for a new construction home as for a resale home, and not just when the home is finished. You need a multi-inspection approach that includes the foundation phase, pre-drywall phase, and the finishing phase.
Real Estate Term of the Week
Construction-Only Loan: A loan that provides funds to cover only the cost of construction. After that, the borrower will need to get another separate loan to refinance the construction loan into a mortgage.