Guide to buying a new construction home in 2022

Valencia Higuera
Valencia Higuera
The Mortgage Reports Contributor
June 7, 2022 - 12 min read

Buying a new construction home in 2022

New construction homes have updated floor plans and appliances, require less maintenance, and they’re often more energy-efficient. Not to mention, new construction might sound appealing in the current market, where existing homes for sale are in short supply.

However, the process of buying a newly built home is slightly different from buying an existing home. Here’s what you should know before you jump in.


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How to buy a new construction home

A newly built home can offer floor plans and designs that suit your style. But while some aspects of these purchases are similar to buying an existing home, other parts of the process differ.

Here’s a step-by-step guide to buying new construction so you know what to expect throughout the process.

1. Get a real estate agent

Real estate contracts are complex whether you’re buying a new home or an existing home. So it’s important to work with the right real estate professional.

A real estate agent can help negotiate your contract with the builder and answer questions you have about the process. Typically, the builder pays the real estate agent’s commission. So you won’t have to worry about paying your Realtor out of pocket at the end of the day.

2. Get pre-approved for a loan

Real estate agents generally require a pre-approval letter before you can make an offer on a new construction home. This involves contacting a mortgage lender to see if you qualify for a home loan. Pre-approvals remove the guesswork and determine what you can afford to spend on a house.

Your lender can also recommend the best type of financing for a new build. This will vary depending on the type of new construction and the type of builder you’re working with.

3. Choose the right type of home and builder

There are different types of new construction properties, so you must choose the right type of builder. New builds include tract, spec (semi-custom), and custom homes.

  • Tract homes are properties built within a new development or subdivision. The builder purchases a large tract of land and constructs houses on each lot (you choose your lot)
  • With a spec home, a builder selects the designs and floor plan, builds the property, and then sells a move-in-ready home. Some spec homes are semi-custom, meaning you can choose some of the finishings
  • A custom home, on the other hand, is completely customizable. The builder constructs the house to your specifications on your land

The type of new construction home you plan to buy will affect your timeline and financing. So work with your Realtor closely to evaluate your options and choose the best type of home for your situation.

4. Schedule a design consultation

After choosing a builder, you’ll schedule a design consultation. If you’re buying a tract home, you’ll choose a floor plan, flooring, cabinetry, paint, and other design features.

Tract homes have limited design selections compared to custom homes. For example, a tract home builder might not offer heated floors, whereas this feature is available in a custom home.

Some spec homes are completely built and designed before they’re listed for sale. In this case, you’re unable to make customizations.

5. Sign a builder contract

Once you’re pre-approved for a loan and you’ve chosen a builder, you’ll sign the builder contract to start construction on your home.

This contract includes a description of the property, the projected timeline, the cost, payment schedules (if applicable), warranties, and so on.

6. Finalize your mortgage and begin construction

Depending on your loan program and the type of new construction home you’re buying, financing can play out a few different ways. You might close on a construction-only loan prior to the build and then take out a separate mortgage once the home is complete. Or, you may be able to use a one-time-close loan that converts from a construction loan to a permanent mortgage.

Most people end up using two loans to complete the purchase if they’re designing and building a new home, whereas those buying within a new-build community are more likely to use a one-time-close loan.

Your Realtor and loan officer will walk you through the process and timeline for financing depending on the type of home you’re buying and the loan you plan to use.

New construction loans

There are a few different ways to finance a new construction home. Your loan type, loan process, and interest rate will depend partly on which type of financing you plan to use.

Loan types

Loan options with a spec or tract home — one that’s not built to your exact specifications — are the same as buying an existing property. Options include conventional, VA, FHA, and USDA loans. Additionally, banks and credit unions might offer special first-time homebuyer loans or low-down-payment loans for new construction.

With spec and tract homes, the builder begins construction once you’re approved for a mortgage and you’ve signed the builder contract. Since the lender owns the land, you’ll get a single loan that covers the house and land together.

Custom homes, however, require a construction loan. A construction-to-permanent loan is a common option available with the FHA, conventional, USDA, and VA programs. This short-term loan pays for each phase of the building process and converts to a permanent mortgage loan after construction.

Another option is a construction-only loan. With this, you’d use funds to construct a home and then pay off or refinance the loan into a permanent mortgage after completion of the project.

If you have a contractor’s license and experience building a home, you may be able to get an owner-builder loan. In this case. you’d act as your own general contractor and receive funds to complete the project.

Application process

You must apply for a mortgage before starting a new construction project. A pre-approval provides proof that you’re qualified for a certain loan amount.

New construction homes often involve specific upfront costs. For a spec home already constructed, the upfront costs are similar to buying an existing home. You’ll include an earnest money deposit with your offer and you’re responsible for the appraisal, home inspection, lender fees, and other closing costs.

If you’re buying a new construction tract home, you’re also responsible for the earnest money deposit, appraisal, and home inspection. In addition, the builder might require 1% of the “cost of upgrades” upfront. They’ll apply funds to your down payment and closing costs.

The process is different for a custom home. With this type of construction, builders receive funds at different phases of the project. The bank releases money to your contractor on a draw schedule as construction is completed.

Mortgage requirements

Mortgage requirements for tract and spec homes are often the same as an existing home. Your credit score and down payment requirements depend on the type of mortgage program.

For example, you’ll need a 620 credit score with a conventional loan (minimum 5% down), and a 580 credit score with an FHA loan (minimum 3.5% down).

Unfortunately, though, if you’re building a custom home some lenders require a higher minimum credit score, ranging from 680 to 720 (regardless of loan program). Some construction loans also require a down payment of at least 20 percent.

Interest rates for new construction

Mortgage rates for a new construction spec or tract home are often the same as existing home rates. Factors that influence rates include your credit score, the loan term, and the size of your down payment.

On the other hand, construction loan rates are generally higher than standard mortgage rates. These loans are riskier because they’re not secured by a completed property. However, conversion to a permanent mortgage after construction often results in a lower rate.

Talk to your lender about rate locking when buying a new construction home. This protects you from rate increases due to market fluctuations.

Typical rate lock periods are 30 to 90 days, so your lender might recommend locking your rate within a couple months of closing. Some lenders also have extended rate lock programs for up to several months, allowing you to lock your rate through the entire construction project. These longer periods might require an upfront deposit.

Advice for buying a new construction home

Here are a few tips for buying a new construction home:

  • Research the builder and neighborhood before starting a project
  • Make sure you understand standard property features versus upgrades
  • Ask about a builder warranty
  • Home inspections on new construction are optional but highly recommended
  • If you’re building a custom home, use a lender that’s familiar with construction loans
  • If you’re buying a tract or spec home, you don’t have to use the builder’s preferred lender
  • Remember, model homes are upgraded versions of the property. Keep your upgrades within budget
  • Ask about builder incentives

Your Realtor or real estate agent will be key to helping you navigate this process. It’s a good idea to work with an agent who works with new construction homes often and knows the ins and out of the process by heart. This way, they can guide you through construction and help anticipate and solve for any possible snags along the way.

New construction home vs. existing home

New construction homes have some advantages over existing homes. They typically have modern floor plans, reduced maintenance costs, warranties, and there’s the ability to personalize the home.

The downside, though, is that it takes months to complete and move into the home. Also, newly built homes are around 13% more expensive than existing properties on average.

Also, with an existing home, you can move into an established neighborhood within a few weeks. Newly built homes might have fewer amenities nearby, or could be in communities still in the process of being built.

But depending on the age of an existing home, it might not be as energy-efficient. And the home design might not reflect your personal style.

New construction homes FAQ

What’s the down payment for a new construction home?

If you’re buying a new construction spec or tract home, the down payment for these properties is similar to purchasing an existing home. You can expect to pay a minimum of zero to 5 percent down, depending on the mortgage program. If you’re buying a custom new construction home, some lenders require at least 20 percent down.

Do you need a Realtor for new construction?

A Realtor or real estate agent is recommended when buying a new construction home. This professional can help negotiate the contract, answer your questions, and look out for your best interest. In most cases, the builder pays the real estate agent’s commission.

Do you need a pre-approval to buy new construction?

Generally speaking, most builders require a mortgage pre-approval before starting construction on a home. In addition, your real estate agent might require one before negotiating a contract. A pre-approval is proof that you qualify for a mortgage and it determines how much you can afford to spend.

Can you get an FHA loan on new construction?

You can use a standard FHA loan when purchasing a new construction tract or spec home. In addition, you can use an FHA construction-to-permanent loan for a custom build. A construction-to-permanent loan is short-term funding that pays for different phases of the building project. After completion, the loan converts to a single permanent FHA mortgage.

What do appraisers look for in a new construction home?

Before closing, your lender will schedule a home appraisal. This ensures that the home’s purchase price isn’t more than the property’s value. As a general rule, the lender will not lend more than a home’s value. The appraiser will compare the property with recently sold homes of similar size and with similar features.

When do you pay for a new construction home?

Upfront costs associated with a new construction home include an earnest money deposit, an appraisal, and a percent of design upgrades (with tract and spec home). However, you don’t start paying a mortgage until after closing. With a custom home, your lender releases funds to your contractor at different phases of the building project to cover supplies and materials. After completion of the project, the construction loan may convert to a permanent mortgage.

How do I find new construction homes?

Your real estate agent can help you find a new construction home. Some builders purchase land and build new construction homes, either inside or outside of a subdivision. You can visit a model home to preview floor plans or search local listings for newly constructed homes. For a custom home, you can purchase land and then meet with a custom home builder to select a floor plan and begin construction.

Do I need title insurance for new construction?

Yes, title insurance is necessary for a new construction home. This type of policy protects against covered threats to the title of your property. You might encounter problems if a contractor files a lien on your property after closing. This can happen if they weren’t paid by the builder. Title insurance protects against potential liens.

Your next steps

Whether you’re buying new construction or an existing home, your first step is to meet with a mortgage lender and get preapproved to learn what you can afford. You’ll need this preapproval letter in hand to make a serious offer on any home you hope to buy. In addition, your lender can talk you through different options for new construction financing and help you choose the best loan type to meet your needs.

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