New Construction Home Hot Tips
For some buyers, the challenge of a new construction home offers state-of-the-art, energy-saving construction, customizable floor plans, upgrade options and lower maintenance costs.
With much of the attention of the real estate industry focusing on existing or resale homes, it’s easy to forget that the homebuying process can vary significantly depending on the type of home. Here are four ways that buying a new construction home differs from the traditional home search and purchase process.
The first difference with new construction sales that homebuyers will notice is the process of finding a home. Many homebuyers still enjoy grabbing the Sunday paper’s real estate section and driving through neighborhoods. While they may find new construction advertisements in the local paper, the half-constructed structures, a lack of landscaping, and construction fencing blocking the view may make the drive-by method less useful.
In the past, learning about new subdivisions or condo developments took some work. However, you can now find a wide array of options online. Realtor.com, Zillow, and Redfin all offer online search tools for builder plans or newly constructed homes. Another website, NewHomeSource.com, focuses exclusively on new construction.
Once you get serious about buying a new construction home, be sure to involve your real estate agent or broker. You may also need to contact the builder’s sales office. Be aware that in hot markets, competition for new construction homes can be tough. Last year, more than two dozen buyers in McKinney, Texas, camped outside of a builder’s office to snag a home in a new development.
Getting a Mortgage
Financing options for a newly built or under construction home also differ from those of resale homes. Standard loan programs, such as FHA, VA, USDA, and conventional loans, are available in some cases. In other cases, buyers will use special construction loan financing and financing through a builder’s preferred lender.
Construction loans are short-term loans of up to one year that allow you the time and funds to build a home. Bankrate notes that they typically offer a variable interest rate and allow you to make interest-only payments while the home is being built. Funds are dispersed by the lender for each stage of construction. In one loan variation, known as construction-to-permanent, the balance of the construction loan rolls over to a traditional home mortgage when construction is complete, contractors are paid, and the home is certified for occupancy.
Some major builders also offer financing through a subsidiary or affiliated company to their customers. Builder financing through a reputable firm can be a good option for some customers. However, problems sometimes occur, so buyers should investigate fully before going this route.
Ordering the Appraisal
The appraisal is still an important step in the homebuying process for a new construction home, but buyers should expect it to work a little differently. With the typical appraisal, an appraiser identifies recent comparable home sales, usually within the same neighborhood. However, these comparables for new construction homes in new subdivision developments are often few and far between.
Fannie Mae guidelines still recommend appraisers use comps in the subdivision and neighborhood to demonstrate market acceptance of the new development. However, appraisers have other tools at their disposal. The developer typically provides lenders with the home’s building plan, spec sheets, plot plan, and a cost breakdown list. The lender then provides this information to the appraiser. In some cases, appraisers take a “cost approach” to valuation, determining the estimated value of the land plus the estimated cost to replace or reproduce the structure on the land.
Obtaining Title Insurance
Lastly, when buying a new construction home, many buyers are surprised to learn they still need to purchase title insurance. Many look at a brand new structure on a newly developed piece of land and forget that many people may have owned that real estate before the current developer bought it. Such parcels may have undiscovered claims, and those claims could affect a buyer’s ownership claim to their new home.
Beyond the history of a new construction home’s land, more recent issues can also exist. A builder is responsible for paying contractors, subcontractors, and suppliers before the sale of a new home. If one of these parties doesn’t get paid, they can pursue the debt through legal means, and with construction, such bills attach to the property, not the builder’s enterprise.
When a new construction home is financed, the lender will insist on a title search and a title insurance lender’s policy to protect its investment. Homebuyers should consider purchasing a title insurance owner’s policy, which, unlike the lender’s policy, can offer protection of the homeowner’s investment.
If you’re considering buying a new construction home, you’re not alone. Many buyers enjoy cheaper maintenance costs and a home that’s customized to their needs. You’ll still shop for a home online and with your agent, but be prepared for a mortgage, appraisal, and title process that may differ from what you’re used to with an existing home sale.