Construction Deconstructed

The market has been very difficult to navigate in the last 12 months with high interest rates and very low inventory. If you haven’t found the right home, it may be time to consider a new build. There are a lot of misconceptions about new builds – financing being #1! Let’s break it down.

5 Myths of New Construction 

1. A Construction Loan is Required

• Truth: Not necessarily! For standard new builds, many builders handle the financing themselves, meaning you close with a conventional mortgage, much like buying a resale home. Custom builds on your own land are more likely to need a construction loan, where the risk of custom, potentially quirky choices (think yellow counters and shag carpets) is yours to manage.

2. New Homes are Pricier Than Resale Homes

• Truth: While initial price tags might be higher, new homes often come with fewer immediate repair costs and energy efficiencies that save money in the long run.

3. Slower Appreciation

• Truth: Not always true. Location, market trends, and property features play a crucial role in appreciation rates.

4. Building Takes Forever

• Truth: The timeline varies. A spec home can be move-in ready in just a couple of months, while fully custom homes might take over a year. It’s all about how much personalization you need.

5. Lack of Character

• Truth: This is all about design choices. Even spec homes can be unique with the right touches, and semi-custom and custom options offer plenty of scopes to inject your personal style.

Financing

You do not need a construction loan or a large down payment to own new construction. Many builders prefer to carry the financing of the build meaning you close with a conventional mortgage. You provide a deposit at contract signing, like the deposit (EMD) you’d make on a resale home, then you secure a traditional mortgage at closing. The process is very similar to a contract on a resale home when it comes to financing. 

When do you need a construction loan? A fully custom home may require a construction loan. This typically occurs when you’ve purchased a plot of land and contract with a builder to build a custom home on the lot. The builder does not want to assume the risk of building a home to your taste and not being able to resell it if the contract does not close. Say, for example, that you want yellow counters, gold cabinets, and shag carpets throughout the home. The builder will have a difficult time selling a home with your selections, so they minimize risk by having you finance the build. If the contract does not close, you are then responsible for selling the home. 

What is a construction loan? A construction loan is a temporary loan used to finance the construction of a new home. Upon completion of the home, the loan will convert to a traditional mortgage. During construction, you will only make interest payments on the amount withdrawn from the loan. As the withdrawn amount increases, your interest payments will increase. 

Understanding Different Types of Builds

  Spec Homes: Built with popular finishes and minimal wait time. They’re move-in ready and ideal if you’re looking for quick, hassle-free homeownership.

  Semi-Custom Homes: These offer a balance, allowing you to choose some design elements while keeping some builder-standard features. It’s a great middle ground if you want a say in your home’s design without the full responsibility of a custom build.  Fully Custom Homes: For those who want complete control, a fully custom home is the way to go. You’ll pick everything from the lot to the doorknobs, and while it’s the most time-consuming and often the priciest option, it ensures your new home is exactly what you’ve dreamed of.

LOT SELECTION: Meet with builder to walk existing or new sites and determine which lot works best for you.

HOME DESIGN: Meet with home design team and/or an architect to choose or fully customize your floorplan and design elements.

FINALIZE + BUDGET: Finalize the design with the builder and determine cost of home.

P&S: Agree on terms of build, cost, and execute sales contract.

HOME CONSTRUCTION: Home is built according to agreed upon design and cost. Process can take 1-3 months (Spec), 4-8 months (semi-custom), or 8+ months (custom).

INSPECTIONS + APPRAISAL: New construction must be built to code and inspected. An appraisal is also completed for tax and loan purposes.

CLOSING: Home ownership! Secure loan.

WARRANTY: New construction typically comes with a 1+ year warranty covering structural and utility defects.

Ready to Break Ground? Let’s Chat!

Diving into a new construction might just be the perfect step to finding your dream home this year. If you’re tossing around the idea or itching to choose paint colors and floor plans, I’m just a message away!