How to buy a new-construction home

What to know about buying a new-construction home

Buying a new-construction home doesn’t necessarily mean you have to come up with the blueprints from scratch with your builder. There are varying levels of customization options for the buyer — it depends on how much say you want to have in the home’s details.

You can generally choose from spec, semi-custom or custom homes.

• Spec homes are already built and move-in ready, so you won’t have much say in any special features unless you take on the work yourself after purchasing the home.
• Semi-custom homes have a set plan for the exterior and interior but may let you choose specific design elements, such as cabinet colors or the type of flooring used.
• A fully custom home allows you to have a say in all details of the home’s construction, from the floor plan to the light fixtures.

The levels of customization vary based on the builder you work with and where you plan to build. If you buy a lot in a neighborhood already owned by a developer, you may be limited in the type of home you can build. The builder may set the plans for the house on that specific lot, but you could still customize the interior to your liking.

You’ll want to consider how much you want to be involved in the design aspect of your new home so you can find the right builder and location for your needs.

What is the process for buying a new-construction home?

Some aspects of buying new construction are similar to buying an established home. For example, unless you're paying cash, you’ll need to apply for a construction loan to purchase the property. However, there are other parts of the process that may differ. Here’s what you can expect if you want to buy new construction.

1. Application and preapproval

Start by finding a lender that offers construction loans — not every lender does. Once you’ve evaluated potential lenders and the loan products they offer, the application process for a construction loan is fairly similar to that of a conventional mortgage.

Application requirements for construction loans tend to be more strict than for conventional mortgages.

You submit an application, and the underwriter thoroughly reviews your financial information. Construction loans tend to have more stringent requirements than conventional mortgages. Lenders are typically looking for lower debt-to-income ratios, higher credit scores and more significant down payments from applicants.

For example, while some lenders will allow a 3.5% down payment for a conventional mortgage, you may have to put down 20% of the estimated costs for a construction loan.

When the underwriter has completed their review of your finances, you’ll receive a preapproval decision that helps you move forward with building your dream home. This lets you establish your construction budget and gives builders an idea of what you can spend.

2. Get an agent

Hiring a real estate agent to help you through the process may be especially important when buying and building new construction. While this may be a new process for you, many real estate agents have experience helping buyers purchase lots and construct new homes.

They can help you negotiate a fair price for the project and offer their expertise in customization options. For example, your agent may have insight into which fixtures and flooring will give the home a higher value in the future.

You can start by asking friends and family for their real estate agent recommendations. Interview more than one agent and ask each one about their experience with new-home construction.

3. Pick a spot and find a builder

The location of the property is a huge consideration. For instance, you may want to purchase a lot in a new suburban development from an established builder, or you could have dreams of building in a rural area.

Either way, it’s often beneficial to find a builder who can help you choose the right plot of land. Some properties may have beautiful views but aren’t ideal for construction.

You’ll want to spend some time researching reputable builders. You can ask your real estate agent and lender for their recommendations and search the National Association of Home Builders directory.

If you decide to buy a lot in a development already owned by a builder, you’ll probably have to put down a new-construction deposit, which can be 5% to 10% of the purchase price. This deposit is usually nonrefundable, so you’ll want to be certain you're ready to move forward with that particular builder.

4. Design the home

Once you've decided on a builder, it’s time to design your home. Most lenders require a detailed plan from a licensed contractor or builder for the home’s construction. This may include blueprints or drawings and a list of estimated costs for the project. In addition, you’ll also need an appraisal to estimate the property's future value based on the plans for the project.

As you work with your builder to draw up the plans, they may offer certain upgrades, such as custom cabinetry. Your builder could require a deposit to make those upgrades to the home’s original plan. Deposits can range from 25% to 50% of the upgrade costs.

5. Get an inspection

The builder or contractor will conduct routine inspections throughout construction, but you’ll want to hire your own home inspector to ensure the house is built to code and has no major structural issues.

The last thing you want is to approach move-in day only to find out there was a serious problem with the home’s foundation. An independent home inspector acts as a second set of eyes, and they can monitor the homebuilder’s progress.

Is a new-construction home a good investment?

Buying a newly constructed home could be a great investment, especially if it’s built to your specifications and you'll enjoy it for many years to come. You may not want to sell and move again once you have a home that checks all your must-have boxes.

Another perk of new construction is access to a builders warranty, which protects you from paying for costly repairs for defective materials or work that was done incorrectly. Keep in mind that this warranty only covers specific components for a specified period (e.g., two-year warranty for the HVAC system; 10-year coverage of major structural defects).

What to consider when building a home

A significant downside to building a new home is that construction costs often go over the original budget. This could be due to rising material costs or unforeseen delays. Going over budget could also mean you’ll have to make up the difference in cash if your lender doesn’t approve a higher loan amount.

In addition, if you don’t do your research to find a reputable builder, you could work with a less-than-honest individual who may try to steal your money. One way to avoid being scammed is to research each homebuilder to ensure they're licensed and insured. Also, consult with your attorney before signing any contracts.

Bottom line: Should you get a new-construction home?

New construction can come in a few different forms: custom, semi-custom and spec homes. Many individuals purchase lots in developer-owned properties, where the builder and the home plans are pretty well established. It could make sense to consider a custom home if you have specific needs and wants that most existing home plans don’t satisfy.

If you plan to build a custom home, you’ll want to ensure you have extra savings available to cover any expenses outside your budget.

If you don’t want to design a home from scratch, you might consider a semi-custom home with a builder that gives you a say in the design elements of the interior. Keep in mind that upgrades will add extra costs to your budget.

A spec home may be an excellent option if you want a new home now that’s move-in ready. Since spec homes are already built, you won’t have to wait months (or years) for the construction process to finish. Also, you’ll have a better idea of how much the home will cost based on the asking price. While there's still room for price raises or drops depending on negotiations, the cost may not vary as much as building a home from scratch.