Do Your Homework
There are variety of things that need to be researched to make the best decision on your new home. With new construction you should be researching not just the home but the builder as well. One of the first and most important things to research is your local builders. Look into their reputations, their construction quality, warranties and feature options. It’s important to know what to look for in the perfect home builder.
Another area to research is the home location. The neighborhood, shopping areas and schools are all things to look into. If choosing to custom build your home you should be researching areas of available land as well. Here is a guide to neighborhood details you should consider when searching, written by Bill Gassett.
One of the perks of buying new construction is the variety of interior and exterior options for the buyer. You may have the ability to choose many different features in a home. Some features will come standard with the homes and some will be considered upgrades.
Hardware, countertops, cabinet color, flooring, crown molding, decks, landscaping and fireplaces are common choices buyers will have. It is good to compare these options when deciding on which builder to use for your home.
Financing with new construction is a bit different, especially if choosing to custom build your home on your own. If buying a home in a development under construction you can go with a traditional mortgage company or bank.
Builders often times have their own financing options for buyers as well. Choosing this route can save time and paperwork but you may not necessarily get the best rate. Always shop around for the best rates. If choosing to custom build your home, new construction loans may be something to look into.
In a nutshell they can supply you with some initial funding to build the home and then carry on into a long term loan. New construction loans should come from local banks or other organizations. Often times the banks will need inspections done during the building process and after.
In order to provide you with all the information you need about financing a new construction home, I asked a mortgage expert. Here is his expertise on the subject of financing for construction loans:
Buying a home that is completely finished is quite different from getting a construction loan. The construction process has various steps along the way. There are also chances for delays due to multiple circumstances. The following outline explains the basics of a construction loan and will prepare you for procedure.
LOCAL LENDING IS KING OF CONSTRUCTION LOANS
Most construction loans are handled by either a local credit union or a local bank. A construction loan will have inspections starting from the acquisition of the land all the way to the day the new homeowners are ready to move in. There are also multiple appraisals. A nationwide lender, like a commercial bank, would not have access to the local service providers and may not be aware of small nuances. Factors such as school zones, the values of vacant land and other local demographics are the specialty of people in the area.
This is not to say that every local bank or credit union offers construction financing. Some financial institutions have an experienced staff ready to handle this type of loan while other lenders in the area typically shy away from construction lending. Calling around and getting information from more than one lending source will save you some time and trouble.
TURNKEY FINANCING CAN BE A BETTER CHOICE
With a traditional construction loan, the basic steps go like this:
1. Buyer finds the right vacant land.
2. Buyer is approved for a construction loan from local lender
3. The lender will make periodic payments to the contractor to build the home. The buyer is asked to make payments to the lender on the construction loan.
4. When the home is complete and the lender has approved the building, the last disbursement of the construction loan is made to the contractor.
5. Buyer gets a new mortgage. This mortgage pays off the construction loan and becomes the permanent financing for the home.
As we mentioned earlier, there are many steps to a construction loan. This is the reason that many contractors have moved to turnkey financing.
With turnkey financing, the home builder gets approved for a loan. The builder is solely responsible for making payments on the loan throughout the construction process. After the home is finished the buyer will get a mortgage to pay off the builder and buy the home.
Most builders that participate in turnkey financing ask prospective buyers to get pre-approved for a mortgage. This insures the builder will have a buyer for the home and reduces risk for the builder.
FANNIE MAE AS WELL AS FHA OFFERS AN ALTERNATIVE TO CONSTRUCTIONS LOANS
For people who find a less than ideal home in a great area, there may be another alternative. FHA offers a program called the 203k Mortgage and Fannie Mae offers the Homestyle Mortgage. These programs will allow prospective home buyers a chance to get a loan to buy the home AND borrow extra money to make repairs and even renovations. This means that the borrower only has to get approved for a mortgage once.
When you purchase a new home the builder often offers a home warranty. Drywall, roofing, HVAC systems, plumbing and electrical systems are all areas that are normally included in the warranty of a new home. It is important to look closely at the time frame for the warranty. Some features are included in the warranty for only a certain period of time. For more information on new construction warranties please take a look at my article “Warranty Options for New and Existing Homes.” There will also be inspections done some by the bank lender and some by the builder.
With existing homes there is often room for price negotiations and a buyer and seller can go back and forth until an agreeable offer is reached. With new construction builders are more likely to negotiate with upgrades for a home rather than price. For example instead of dropping a price they may offer a free finished basement instead. As with all contracts and negotiations, always be sure to get your agreements in writing.