If you’re currently thinking about buying a home and you are unsure whether to buy a pre-existing home or building a new one, keep reading for some of the differences between the two, which will arm you with some useful decision making material. The best way to avoid costly surprises when purchasing a home is to educate yourself on the different mortgage processes associated with the specific home you have chosen to buy. Below is an outline, and a few of the key differences between buying a pre-existing home or building a new home. Of course I always recommend having a conversation with your trusted mortgage and real estate professionals about your specific needs before you make a firm decision.
What is the difference?
Buying a pre-existing home, also known as a resale is when you purchase a property that is already built and has been lived in by a previous resident. Whereas, a newly built home is either one you have custom built for you by a builder, or you can purchase a home from a builder who offers a selection of floor plans to choose from along with the ability to customize the smaller details like appliance type, paint colours, countertop material, etc. There is also a third option called a “self built” home, however, this is a much more complex process which requires superior expertise, experience and time when it comes to financing.
One of the key differences between the different options is how you can “protect your investment.” With the purchase of an existing home you would likely have an inspection done initially in order to determine if there are any pre-existing problems with the property that may affect your decision to purchase it. With a new build, there is really nothing to inspect prior to purchasing it, however, one would expect there to be no significant problems because it is a brand new home. Having said that, what if something wasn’t done correctly during the build and you weren’t aware of it for some time after you moved in? To put your mind at ease, your newly built home will likely come with a New Home Warranty Certificate which can be issued by a number of different providers, it protects you in the event something does go wrong with the property as long as it’s covered under that warranty. Most lenders require the builder to have this 3rd party warranty in place before they extend a mortgage.
When buying an existing property, you would likely use a realtor to facilitate that process for you, as it’s the seller of the property that covers the real estate fees. It’s essentially free to you when you use the services of a realtor, and it can only be good for you as a buyer to have an experienced professional do the negotiating on your behalf. With a new build, you may choose to work directly with the builder or representatives of the builder in choosing the floor plan, location, and all customizations for your new home. It’s important to note that some realtors work with builders and can help to navigate some of the other details of the transaction on your behalf.
Securing the mortgage financing for the purchase of an existing property seems to be less complicated than that of a new build, however, that alone shouldn’t deter you from purchasing a new build. A little education can go a long way in managing your expectations and preparing you for the process you will have to go through when buying a home. When purchasing an existing property you will provide the lender with a copy of the offer to purchase and the property feature sheet. You will have an agreed upon possession date as well as a set purchase price. The lender will then proceed with your financing request and come back to you with a “conditional approval”, further supporting documentation will be required from you based on your individual unique financial circumstances before the approval is finalized. Most offers I have seen lately will include a “condition to financing” date, which is on average about 5-7 days after you write the offer. These 7 days will give the lender sufficient time to unconditionally approve your financing request after receipt and review of all the supporting financial documentation you have been asked to provide. You will know what your payments will be at time of possession, as the interest rate you are given at time of approval will be honoured until your date of closing.
With a new build, there are 2 different kinds of mortgage options available for financing your purchase. The first one is called a “draw mortgage” where the builder you have chosen to work with will require multiple advances of the mortgage funds at specific stages of construction. For example, you will provide your downpayment, whether it is 5% or 10% of the purchase price or more, at the time construction of your new home begins. Your builder will then request mortgage draws throughout the construction process. The “draw” schedule required by your builder is detailed in the purchase agreement you initially signed with the builder, and the mortgage rate you will get could be set at the time of the first draw with some lenders.
The second financing option is called a “completion mortgage” which is similar to the financing for an existing property, with the exception of a longer rate hold requirement that is likely higher than the rate you are able to get when closing within the usual 60-90 days rate holds. Under this option, the mortgage is not advanced until the property is 100% complete. This means you would be required to provide the builder with an initial deposit at the time you sign the purchase agreement, with the remainder not required until a couple of weeks before the completion date. It is really up to your builder as to which type of mortgage financing will be required.
Incentives and upgrades affect financing options on new builds, so do the details about who owns the land where the home is to be constructed on. I would suggest you speak to a mortgage specialist who is experienced in builder mortgage financing if you are deciding to purchase a brand new home. There are many other items involved in this type of financing that have not been mentioned in this article, but are vital and impactful to the large commitment a buyer makes when purchasing a property of any type.