How to Buy a New Construction Home
With existing housing inventories at historic lows, more and more buyers are looking at new-build housing to get into the property market. Here’s what you need to know when buying a new construction home.
STICKS AND BRICKS: BUYING A NEW BUILD HOME
As the U.S. scrambles to meet unprecedented demand for homes, new construction makes up an important segment of the property market. New construction homes are usually significantly more expensive than comparable existing properties but are often the only options for buyers seeking a foothold in crowded markets with limited entry-level stock.
That said, for many buyers, new builds offer many desirable features including:
- A choice of layout and finishes
- Up-to-date construction standards, wiring, and energy efficiency
- Lower maintenance costs
- Warranty protection against unexpected problems
At the same time, buying a new build home can also mean:
- Added expenses for any upgrades or premium finishes
- Limited opportunities, at least initially, to build equity through easy upgrades
- Unexpected costs for materials or labor or due to weather or zoning delay
There are also some key differences in how new construction property is sold and financed. Let’s take a closer look.
TYPES OF NEW CONSTRUCTION
New-build homes usually fall into one of three major categories of construction. These are:
- Custom: Buying an empty lot and hiring an architect and builder will allow you to build exactly the home you want within the limits of your budget and local planning regulations.
- Semi-custom: Buying into more prestigious new developments will allow you to choose from a limited number of lots and a wide range of styles and customization options for your home.
- Spec or production: Choosing a pre-built or already started “tract” home built to a standard template is often an economical choice that comes with a few limited options for paint or add-ons.
STEPS FOR BUYING A NEW CONSTRUCTION HOME
Important steps for navigating the purchase of a new construction home include:
1. Understanding Your Timeline
The most important difference between buying a new versus an existing home is understanding and managing the more complex and uncertain timelines involved. While an existing home purchase will usually take a few weeks, building or completing a new home can take months or even years.
Additionally, you may need to manage the sale of an existing home or the closing of a long-term mortgage while simultaneously facing shifting completion dates, unexpected delays, and changing construction costs. Be sure you’re ready to pay double mortgages or move into transitional housing if necessary.
2. Get Pre-approved for Financing
Just as with buying an existing home, prospective buyers of new construction homes seek pre-approval for loan financing based on their credit rating, income, assets, liabilities, and likely down payment. Depending on the type of new construction home you’re considering, you may require:
- A conventional home loan: If you’re buying a property that is complete or very close to completion you’ll be able to apply for a regular fixed or adjustable rate mortgage.
- A construction loan: Similar to a line of credit, this is a short-term loan that allows you to draw advances to fund ongoing construction. Some construction loans convert to a regular home loan on completion, but for others, you’ll need to negotiate a separate mortgage.
- A bridging loan: This is a shorter-term loan that allows you to, for instance, secure a lot even if you’re not ready to begin construction. Or, if you still need to sell your existing home to secure capital for a down payment on your final mortgage, you would use a bridging loan to make it happen.
Not all lenders offer specialized construction financing. But in many cases, large property developers will offer construction financing or even long-term mortgages with their own approved lenders. While convenient, be sure to compare the rates and terms of this financing option with those available from other independent lenders.
3. Get a Buyer's Agent
Most people choose to hire a realtor or agent to help them find prospective properties and negotiate a sale. If you will be negotiating with developers or construction companies over unbuilt or partially built properties, it’s important to hire an agent with specific experience in new construction homes.
An experienced buyer’s agent will be familiar with the major development projects in your area. They’ll be able to help you negotiate construction and purchase agreements with builders and will understand how issues like cost overruns or option changes will be handled.
4. Research Neighborhoods and Builders
Work with your agent to get to know the different builders working in the area you’re considering and the neighborhoods they’re developing. Builders may range from local construction firms to national property development conglomerates. It’s important to learn as much as you can about their reputation and track record by:
- Talking to current owners
- Reading online reviews or media coverage
- Checking Better Business Bureau ratings.
5. Negotiate Options
You won’t know the final price of your new-build home until you lock in all the available options. The more custom your home, the more leeway you'll have for everything from roofing and siding to molding and cabinet knobs—and the more potential for cost overruns.
6. Schedule Inspections and Review Warranties
Even though you’re buying a new-build home, you should still schedule an independent home inspection before closing to make sure everything works and your home has been built as promised. You should also carefully review warranties for your home and appliances so you know what they cover and for what length of time.
BUILD BETTER WITH RED RIVER CREDIT UNION
Buying a new construction home requires patience and flexibility, but the result can be a low-maintenance dream home that meets the needs of your family for years to come. At RRCU, we offer a wide range of flexible and competitive mortgage products1, including land-only and new construction loans.
We offer our members and future members:
- Fixed and adjustable rate mortgages
- Low down payment options
- Tools you need to begin your home-owning journey today because we can prove we have every tool they need available
Click below to learn more.
FIXED VS. ADJUSTABLE-RATE MORTGAGE (WITH CALCULATOR)
1 Loans are subject to qualification and credit approval. Financing options subject to change. Other restrictions may apply.