Guide to buying a new construction home

What to know about buying a new construction home

One of the first decisions you’ll have to make as a homebuyer is whether to shop for an existing home or build a new one. Opting for new construction means you’ll have the opportunity to customize your home’s layout, features and design to create the perfect home for you, your family and your budget. 

You may be excited to dive in and start picking paint colors and flooring, but there’s a lot to learn about buying new construction before you get started. If you’re not careful, costs and expectations can spiral out of control. Here’s what you should know before buying a new construction home. 

What is new construction?

A home is considered new construction when the buyer is the first person to live in it. But that can happen several different ways — for example, you can buy a home designed and built by a builder as part of a planned development. That could mean purchasing empty land from the developer and selecting from a variety of existing home designs and floorplans. Or you could opt for a semi-custom home, in which the home is mostly built but you’re able to come in, customize it and select the finishes.

Some new construction homes are spec homes, or new houses built by the developer and move-in ready on the speculation that it will be easy to sell. Some people like the idea of a new home, but don’t want to deal with the hassle and endless decisions that can come from building from the ground up.

A home doesn’t have to be part of a development or builder project to be considered new construction. You could opt to build your own home on your own land, hiring your own contractors and subcontractors to work from blueprints you create with an architect.

How do you finance a new construction home?

If you decide to buy a new construction home, there’s more to consider than where you want to build and what fixtures you want. You’ll also need to think about logistics — for example, getting financing to build a home is different from getting a mortgage on an existing home.

When you're shopping around to find the best financing rates and terms from banks, mortgage companies and other lenders, you may want to check with your builder. Often, custom builders offer short-term financing or construction loans to finance the building of the house.

Temporary financing

Most builder loans are short term, usually with terms of six to 12 months. They’re meant to help finance the cost of building your own home, and, if needed, can be paired with lot financing, which is a loan to purchase the land you build on.

With a construction-to-permanent loan, you can borrow money to pay for the cost of building your house and then, when construction is complete, you can convert the loan into a typical 15- to 30-year mortgage. The main benefit: You only pay one set of closing costs, which can reduce your overall expenses. Another benefit is, you’ll lock in your interest rate when you first take out the loans. So when your construction loan transitions to a permanent loan, you won’t face higher payments if interest rates have changed.

Temporary interest-only financing

A construction-only loan provides the funds needed to build the home but doesn’t convert at the end of the term, usually six to 12 months. Instead, the borrower is responsible for either paying the loan in full upon closing on the new home or whenever the loan is due or getting a mortgage for more permanent financing.

While you’ll only make payments on the interest during the life of this short-term loan, you’ll spend more on closing costs because you’ll have two closings, one when the construction loan is due and one when you secure a mortgage to permanently finance the house. One risk in applying for a permanent mortgage after the home is built is that your financial situation might change. If you lose your job or face other hardships, you may not be able to qualify for the loan you need and might not be able to move into your new home.

Financing through the builder

Many builders have their own lenders or work with a preferred network of lenders. Often, they’ll offer incentives like home upgrades, a home warranty or price breaks if you opt for their lenders. These perks can be a significant value but might not be as good a deal in the long term as a mortgage from a bank since builder financing often comes with higher interest rates and the terms aren’t as favorable as traditional lenders.

Pros and cons of new construction homes

Purchasing a newly built home has its benefits. For starters, the property is in pristine condition. But there are drawbacks, too. Here are a few advantages and disadvantages to consider.

The pros

• It’s brand new. You will be the first person to live there, and everything will be in perfect, pristine condition, from the clean carpet to the unused appliances. That means you likely won’t have to make costly repairs right away.
• It’s customizable. With some new construction, you have the chance to select everything from finishes to paint colors. You can tailor the home to your tastes before you move in.
• It’s energy-efficient. Many builders are using the latest energy-efficient building materials. That could save you money on energy costs over time.
• You can save on warranties and insurance. Homeowners insurance typically is more affordable on newly built homes, and many builders include a home warranty that can help you save money if something breaks.

The cons

• It might take longer. If you’re on a deadline to move into a new home, building or buying new construction might not fit your schedule. Frequent construction delays mean it could take three to nine months to move into a newly built home, especially if you’re designing it yourself or adding extensive customizations.
• Costs can be higher. New builds often have higher listing prices than existing homes, and many builders include a clause that lets them increase the purchase price if the cost of materials goes up. And don’t be surprised if work goes over budget.
• You’ll pay to customize. Some features of the home won’t be included in the purchase price, and some customizations will also be an extra cost. Some new construction homes don’t include basics like toilet paper holders, towel racks or light fixtures. Be sure to budget for items not included by the builder.
• Decision fatigue. Yes, you get to customize things. But unless you’re an experienced interior designer, it’s easy to get overwhelmed by all the choices. Agonizing over a decision about flooring or tile could slow down the entire construction process, and some of these customizations aren’t included by the builder so they will cost extra.
• That new house smell. Building materials like flooring, carpet, wood cabinetry, and paint can emit smelly chemicals called VOCs. In addition to the unpleasant scent, VOCs have been associated with a variety of health issues by the CDC, which has set exposure limits. Luckily, the potentially harmful emissions will fade and eventually disappear.

Tips to help your build go smoothly

When you’re ready to buy, there are a few things you can do to make the process a little easier.

Consider a builder’s risk policy

A builder's risk policy, also known as course of construction insurance, is a specialized type of property insurance essential for new home construction or major renovations or rebuilding after a disaster. It covers the physical structure, materials and equipment against damage or loss from perils such as fire, theft, vandalism and certain weather events. This policy is temporary, typically lasting for the duration of the construction project, and fills the coverage gap left by standard homeowners insurance, which usually excludes properties under active construction. Lenders often require a builder's risk policy before releasing construction loan funds to protect their investment.

Financing your home

Just because you’re buying a newly built home doesn’t mean you can’t negotiate on the price. While you may not be able to convince the builder to drastically lower the price, you may be able to work out a deal that includes a few extra customizations or premium options. If you opt to use the builder’s financing, compare the loan terms to other banks or lenders to make sure you’re getting the best deal you can.

Customizing and upgrading

Know what’s standard and what’s extra by asking the builder about amenities and upgrades, and which ones cost more. Many builders offer feature sheets on their homes that will help you compare all the options. Are there some options, like appliances or painting, that you could save money on by taking care of it yourself? And be sure to keep resale in mind when selecting upgrades. You’ll want your home to be appealing to buyers if you sell it in the future.

Don’t skip the home inspection

You may think that because the home is brand new, everything must be in perfect working order. But there can be issues like leaky pipes, missing GFCI protected outlets, exposed roof nails, etc. You likely won’t find major issues, but having a home inspection can identify any problems you’ll want the builder to fix before you move in and offer you some peace of mind.

Work with a real estate agent

Many builders have their own real estate agents on site, but you’ll want to make sure you partner with a real estate agent and lender you trust. An outside real estate agent might be able to better protect your interests and find you the best deal, just like they would with an existing home purchase.