When searching for a property to purchase, one of the first decisions a homebuyer has to make is choosing between a new build and a pre-existing property. While there are a few differences with the financing between the two different property types, securing the mortgage should not be too difficult and below are six tips to assist in financing a new construction home.
Confirm when the builder wants money
There are typically two common ways to finance a new constructions home, a draw mortgage or a completion mortgage. A draw mortgage or a multiple advance mortgage is when a portion of the mortgage funds are given to the builder at various times throughout the constructions process. A completion mortgage is a one-time advance of mortgage funds given to the builder once the construction of the home is 100% completed.
Aside from the amount of times the builder draws down the mortgage funds, another key difference between the two types of new construction financing is when interest costs are charged. With a completion mortgage, principal and interest payments begin only when the property is completed and the mortgage is funded. With a draw mortgage, there will be interest costs starting with the first advance the builder needs and will continue to increase as further advances are required.
A special note for draw mortgages, not every lender advances at the same stage of construction. Make sure your builders’ construction schedule matches with the lenders draw release schedule as there could be a few issues if they don’t line up with both parties.
Initial deposit amount
Purchasing a new construction home is similar to buying a pre-existing property in that you still need to provide an initial deposit at the time you sign the offer to purchase. For a pre-existing home, the deposit can be $1,000-10,000 depending on what has been negotiated with the seller of the property. Whereas new construction builders most often require a higher initial deposit before they start construction as they will be customizing the home just for you. This can be your entire downpayment in some cases. If you are not able to immediately come up with a large initial deposit, ask your builder if you can spread the deposit amounts out over a few months.
In addition to the higher deposit amount, there may be other extra costs involved with a new construction home. If the buyer adds any additional upgrades to the property at some point during the construction process, some of those costs may have to come out of pocket if the cost of those upgrades don’t add equal value to the total cost of the home. There may also be additional expenses associated with the inspections required before each draw is advanced in the case of draw mortgages.
Do your research
When making the decision on whether to buy a resale home or have a new one built, ensure you feel comfortable with the various professionals you are working with. Are they answering your questions in a clear and concise manner and addressing all of your inquiries in a timely manner? For mortgages and real estate needs, ask your friends and family for people they have worked with in the past and had a good experience with. If you are looking online, look for positive testimonials about that individual. The same applies for home builders, research the companies before you choose who you want to build your new home and again, look online for the reviews from satisfied customers.
Check the New Home Warranty
Before a lender will finance a newly constructed home, they MUST confirm New Home Warranty coverage is in place and has been arranged by the builder before starting construction. This coverage insures the property against specific defects for a period of time after construction is completed. It is important for you to be aware of what it does and does not cover and that any restrictions to the coverage are clear and clearly understood by you, the buyer.
Do be advised there are only a few acceptable New Home Warranty programs acceptable to the majority of lenders. Prior to removing your financing condition, ensure your mortgage lender will accept the warranty program your builder has in place for the new property.
Self-builds are different
You could encounter a whole different set of challenges if you’re thinking of building your own home and acting as your own general contractor. I won’t go into details other than to say it involves a lot of preparation before even being approved by a lender, and choices of potential lenders willing to offer this type of financing will be quite a bit smaller.
A special note about spec homes
A spec home is a property that a builder constructs with the expectation that a buyer will come along and want to purchase that home. Builders will design the home based on what a typical homebuyer would like and financing options for this property type are basically the same as getting a mortgage for a pre-existing property. You agree on a purchase price and possession date and your mortgage is funded on that date under one advance. The only real difference between a spec home and a pre-existing property is the requirement for New Home Warranty coverage.
The best piece of advice I can offer is regardless of what type of property you do end up buying, ensure you are working with knowledgeable professionals you like and trust and who will help make your real estate experience a pleasant one.