Buying a new construction home: Pros, cons, and how to finance it

Step 2: Get preapproved.

Once you know how much you can afford to spend, the next step is to confirm this figure by getting preapproved with at least three mortgage lenders. It’s true — a home loan affordability calculator can give an estimate of your spending power. However, it’s ultimately up to the lender to decide whether to fund the loan.

Getting preapproved for a mortgage before shopping also provides reassurance to builders and gives you more concrete figures to work with. That way, you’ll know what to expect in terms of rates, terms, the down payment, closing costs, and monthly mortgage payments.

Step 3: Hire a real estate agent.

The right real estate agent can simplify the home-shopping process. Real estate agents also lend a helping hand when it’s time to negotiate the purchase price. And if you encounter roadblocks or hurdles, a reputable agent will be your strongest advocate and help ensure the deal doesn’t fall apart.

Step 4: Find the right location and builder.

No matter how perfect your new construction home is, your homeownership experience won’t be as enjoyable if you buy in the wrong location. Hence, the importance of scoping out developments in several areas to find the best fit.

It’s equally important to vet builders. Some are stellar, while others have a reputation for cutting corners and leaving customers disappointed with the process and their new homes. Ask your real estate agent for recommendations, read reviews, and consider builder incentives offered (such as low interest rates or cash toward closing costs) to sweeten the deal.

Also, be mindful of other costs, such as CDD or HOA fees, that typically come with owning in new-construction developments. And don’t forget to inquire about the builder’s warranty for new construction homes.

Step 5: Sign the contract.

If the home is ready for occupancy, you’ll sign a contract with the builder, and the transaction will proceed as it would if you were buying an established property.

If the home is under construction, you should also expect the builder to request a deposit when you sign the contract. The same applies if you’re working with the builder to customize the home.

Be sure to keep your real estate agent in the loop during this stage of the process. Ideally, they will work alongside you when negotiating with the builder to ensure you’re getting the best deal. Your agent will also review the contract in its entirety before you sign to confirm that it includes the necessary terms and clauses, should any hiccups arise with construction or financing.

Step 6: Get an independent home inspection.

Before closing, it’s worth paying for an independent professional home inspection. Doing so can give you peace of mind, knowing the home is free of material defects that could turn into costly issues later. The builder may try to convince you that the home is in stellar shape since it’s new, but there’s no guarantee they didn’t cut corners.

Consider attending the final walk-through before closing, as this will be your last chance to address any cosmetic issues or concerns with the builder before moving in. Once the loan closes, you’ll need to work directly with the warranty company to address any issues with the home.

Financing a new construction home

When it comes to financing a new construction house, there are some differences between getting a loan for a production home versus a custom-built home.

Production home financing

Getting a mortgage to purchase a production home is similar in most respects to getting a mortgage to purchase any other type of home. However, many production home builders have a close relationship with an in-house or affiliated mortgage lender. When such a relationship exists, the builder will likely prefer you to get your mortgage from the builder’s preferred lender.

Buyers may be offered incentives — such as home upgrades, rate buydowns, or extended rate locks — to get a mortgage from the builder’s affiliated lender. These mortgage lenders typically have more experience with new-home financing, which is a plus for both builders and buyers, but they may not offer the most favorable rates.

Custom home financing

Financing a custom home can be more challenging because fewer lenders offer this type of financing, and you may need more than one loan. For example, you may need to obtain a land loan for the lot where your home will be built and a separate construction loan for the building costs.

When your home is completed, you may be able to convert your short-term construction loan into a 15- or 30-year mortgage, or you might need to obtain a new, separate mortgage to finance your completed home. It all depends on what type of construction loan you get.

Pros and cons of buying new construction homes

Like other types of homes, new construction homes come with advantages and disadvantages. These are important to consider when deciding whether to build or buy a house.

Pros

• Fewer repairs. Because new construction homes are brand new, they typically need fewer repairs in the early years of ownership than older, existing homes. Fewer repairs can save homeowners both time and money. Maintenance costs should also be lower with a new construction home.

• Modern style. New construction homes typically feature the latest floor plans with desirable modern elements, such as open kitchens, larger closets, and more storage space. These elements, along with the home’s newness, can be appealing to buyers and may help these homes hold their value, especially compared with older homes.

• Fewer hidden problems. New construction homes are sometimes confused with remodeled or “flipped” homes, although the two types have little in common. New construction homes are completely new. Remodeled homes may be updated or refurbished, but they are not new. Remodeling can “paper over” defects that may prove costly to fix, and buyers might not notice these issues until after they move in.

Cons

• Added costs. Building a custom home — especially on a scenic site in a rural location or on a steep hillside with a spectacular view — can increase construction costs. If the site lacks access to roads, water, electricity, or sewage pipes, connecting to these services will increase the overall cost of the process.

• Construction delays. You might find new construction homes that are finished or near completion. More often, though, these homes aren’t ready for buyers to move in right away. Building a new house can take six months or longer, and supply chain issues or unexpectedly higher costs for materials or labor can cause further delays.

• Lack of landscaping. Many older neighborhoods feature well-established trees, shrubs, and smaller plants that enhance their appeal. New-home developments typically don’t have much or any landscaping until most of the homes have been sold. Even then, trees may be sparse or small.

• Ongoing construction. New construction homes may be located near lots where other homes are still under development. First-in residents will have to endure the dust and noise.

Buying a new construction home: FAQs

Should you buy a new construction home?

It depends on your personal preferences and homeownership goals. If you plan to stay for a while and prefer a place you can tailor to your unique needs before moving in, a new construction home could be ideal. But if you’re on a tight timeline, prefer a more established property, or need to spend less on your purchase, buying a new construction home may not be in your best interest.

Do you need 20% down for a new construction home?

Not necessarily. It depends on the loan product you select. Conventional and FHA loans require down payments of 3% and 3.5%, respectively. Other government-backed mortgages, including USDA and VA loans, do not require a minimum down payment, though the buyer will likely need a deposit to reserve the home until closing. Keep in mind that a steeper down payment of up to 10% or even 20% could be required if you take out a jumbo loan.

How long does it take to close on a new construction home?

The timeline from signed contract to closing varies by lender and the property’s stage. A property that hasn’t yet broken ground typically takes between six and nine months, depending on the level of customization, the complexity of the floor plan, weather conditions, and the builder’s schedule. If there are delays in delivering materials, you may end up waiting longer to close on the home. But if the house is already complete and move-in ready, you could potentially close in 30 to 45 days.

More home types

A new construction home can be a great fit for home buyers, but it’s crucial to know your options. See how new construction houses compare to other home types: