What to know when buying new home construction

by Matt Carson

When your “For sale” is also “Under construction”: How to buy new construction

The housing market is pretty competitive out there right now. There’s a crushing lack of inventory in some areas, so many potential homebuyers are looking for an alternative that doesn’t involve endless bidding wars and settling for what’s available. The solution for many of them? New home construction.

According to the National Association of Home Builders, 33% of all homes sold in the USA during March of 2023 were new home constructions. That’s one in three! It’s easy to see why: You get a dream home that’s new and fresh, one that’s custom-tailored to your needs instead of proverbially buying off the rack.

For this discussion, we’ll talk specifically about collaborating with a developer to construct a new home, which can be a wholly different experience from buying an existing home. With that in mind, here are eight things to know if you are ready to embark on this unique kind of homeownership journey.

Getting pre-approved helps

Once you’ve decided to build, you’ll likely take tours of model homes and meet with building professionals to start planning your prospective house. It’s always good to know how much you can afford beforehand.

You don’t want to get your heart set on a particular plan or model, start to imagine yourself living in it, only to find that it’s out of your price range. Luckily, there’s a way to avoid that kind of heartbreak: pre-approval.

Pre-approval status is really a tool for you to know what kind of budget you have to work with, give your buying power some extra strength and help you make an informed decision about what kind of loan solution will work for you.

Just talk to a mortgage professional to get the ball rolling. Taking care of this early in the process can make life just a little bit easier on you in the long run.

Lender or builder first?

Depending on how you approach building a house, you might either start by reaching out to a builder or a lender. Which should come first? Where does that process start? It may seem like a chicken-and-egg situation, but there are definite pros and cons you should consider before making this decision.

If you reach out to the builder first, they may already have a preferred lender ready to go. They may even offer incentives, such as reduced closing costs or discounted upgrades, to go with that lender since that’s their preferred business partner. On the other hand, you can seek out a lender first which would allow you to get pre-qualified, perhaps even pre-approved for a loan before you start to look at floor plans and pick out upgrades.

Location, location, location

One of the biggest decisions you’ll need to make is not just what you’re going to build, but where. There are many factors that can play into this decision. Here are just a few questions you might ask yourself:

What does the access to infrastructure and amenities like major highways, grocery stores and public services look like? How long will your commute to work take you from that spot? If you have kids, what school district are you in, and what ratings do they have?

If you’re lucky enough to be one of the first ones into a new neighborhood, you’ll be able to take your pick of the best spaces, perhaps a corner lot or one facing the local greenbelt. You may be able to get a better price as well.

If the build site is newly developed, and you’re having trouble envisioning what your neighborhood will look like, feel free to ask your builder to show you some of the completed housing divisions they’ve worked on recently. Seeing that can really make the space come alive in your mind.

Lock in your rate

It’s estimated that the Federal Reserve will announce interest rate increases this year , perhaps more than one. While the interest rate set by the Fed is not the same as the you interest rate for your mortgage, the latter is affected by the former. So, if your mortgage rate goes up by even a few tenths of a percentage point, this can make a significant difference in what you’ll pay over the life of your loan.

Considering the long stretch of time it takes to complete your build, you might go through one or more interest rate increases, so you’ll want to find — and keep — the best interest rate you can.

To do that, you’ll want to lock in your rate. There are many different types of rate-lock products available, so talk to your loan officer on the best way to maintain your rate throughout the entirety of the process.

For the purposes of this discussion, we’ll skip over the intricacies of the loan process itself since we have explored that topic in detail elsewhere.

Patience goes a long way

We’ve touched on this in places already, but it bears repeating — building a house takes time. Before the pandemic, you might be looking at a four-month process from start to finish. Now, a complete build is more likely to take six months to a full calendar year.

Part of this is due to supply chain shortages for building materials. Labor shortages also play a part in that extended timeline. Beyond just those two reasons, the process just has a lot of moving parts, and delays are extremely common even under the most ideal circumstances.

The best way to approach the situation is to simply accept that you’re in for the long haul and know that delays will just be a part of it. We know that’s easier said than done, and exercising patience can be difficult when you’re eager to move into your dream home. If you can realize this going in, it can give you that much-needed peace of mind when delays inevitably occur.

Think about upgrades carefully

The model home you visit should give you a good idea of what the basic design should look like once it’s built. But, you don’t have to limit yourself to that. Almost every aspect of the home can be modified or upgraded to your exact specifications. It’s your house, so this is your time to make it your own.

This could take the form of swapping out carpet with hardwood floors or changing the color and style of the tile in the kitchen, bathrooms and foyer. Maybe you want a hi-end tankless water heater, a different style of cabinets, or an improved type of countertop. You are limited only by your imagination, space, and budget.

Speaking of budgets, just remember to manage your upgrades with care. The builder may have an existing slate of upgrades available immediately or suggest a designer to help you. Ultimately, the specifics of what goes into the house, and what doesn’t, are up to you. It can be thrilling to throw every upgrade you can think of into your new home, but just remember to factor them into your existing budget so the costs don’t skyrocket on you.

Visiting the build site

As your home is being built, you may have the opportunity to visit the site. Most people are naturally curious about how it’s coming along since they have so much mentally and financially invested in the process. Builders are aware of that, which is why you’ll likely be invited to at least two visits while this is going on.

The first one is the ‘pre-drywall’ walk-through. Don’t be surprised if the house looks skeletal, since this is before all the spaces are finished out with drywall. This will give you a rare glimpse behind the walls to the inner workings of the home that you might not see again.

It’s customary for you to have a final walk-through prior to closing as well. At this point, the house should be pretty much the way it will be when you move in. It’s also a bit of a victory lap for you and the builder to see the final product of your vision, effort and patience.

Outside of those two times, it’s best to clear a visit with the builder first. The build site will be bustling, and potentially dangerous at times, so respect the builder and their crew enough to check with them ahead of time before you pay them a visit.

Don’t make any major money moves

Once you’ve started the loan documentation, it’s always recommended that you hold off on making any big financial moves or life changes. Basically, you don’t want to do anything that might affect either your credit score or loan standing. So, don’t go out and buy that new car, close down a credit card, or move too much money around. It’s also best not to change jobs during this time, since then your proven track record of steady income resets.

That’s good advice when going through any loan process, but we bring it up here simply because, again, home construction can take a long time. A lot can happen in six months to a year, so it’s important that you are in a place, both financially and personally, that can stay largely unchanged during that time.

Bottom line, if you are unsure whether or not something might be a potential issue, talk to your loan officer. They can help you make an educated decision to ensure a smooth homebuying experience.

As we said before, buying a new home construction takes time and a healthy dose of patience, but there are many advantages to building a home rather than just buying one. We hope these eight points will help you navigate this process a little easier to fully realize the home of your dreams.

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