Building your forever home from the ground up is exciting, and a dream come true for many. A custom home can be a point of pride to pass down to successive generations and a showpiece for friends and neighbors. Before you lay the first brick on a custom home, there are several things to consider.
How Do New Construction Loans Work?
Finding a lender for your new construction loan is important, especially since credit and income requirements are stricter. While Federal Housing Authority the does have first time home buyers loans available for a newly built home, they are typically are high-interest, short term loans.
Credit score, income guidelines and other requirements for securing a construction loan are more stringent than a regular home loan, so it's important to evaluate your appeal as a borrower.
Another financing option to build a new home is a construction-to-permanent loan. This is best suited for those with solid construction deadlines and a contractor with a history of completing each phase of construction on time. Construction-to-permanent loan lenders pay the builder as the work is completed, then that cost is converted into the mortgage once you close on your home. You are able to lock in interest rates at closing, allowing you to have steady payments, versus variable interest rates and unsteady payments.
Shopping for a lender should be one of the first steps in purchasing a new home. Take the time to compare rates, evaluate your own down payment and pay very close attention to the construction phase deadlines if you choose a construction-to-permanent loan. Your builder will need to be able to meet the bank's requirements in order to get paid and finish your house.
Finding Land to Build a House
Determining where to build your home affects everything from your commute to property taxes. New construction homes are generally built farther away from the city's center; for some homeowners, the longer commute is a considerable trade-off for their custom home.
Many new construction homes are sold as part of subdivision development, with parcels of land for sale. Landowners selling these tracts tend to make them as small as possible, meaning close quarters with your neighbors.
Furthermore, if you choose to build farther away from your city instead of in a subdivision under construction, you may have to run sewer and water lines, and electricity, out from the city. New subdivisions typically have this completed as the land parcels are sold.
Good Questions to Ask a Home Builder When Buying New Construction
Choosing a contractor is important when buying new construction, especially for those applying for a construction-only loan. For example, the USDA requires lenders to approve of the contractor or building company the homeowner chooses in order to grant a home loan. Make sure to ask potential builders the following questions, as it may affect loan options:
- Does the builder have two years of experience building single-family homes?
- Are they currently holding at least $500,000 in commercial liability insurance?
- Do they possess a construction or contractor license?
- Is the builder’s credit history satisfactory with no open liens or judgments?
- Are they able to pass a background check, including no past felonies.?
Your area's Home Builder's Association will have a list of home builders in your area. Be sure to interview your potential builders, including checking references and touring past projects.
Design Build for New Construction
Your decision on whether to hire an architect for your new construction house is largely dependent on where you choose to build. Many planned communities have contracts with a few local builders, with a small selection of floor plans and exteriors to give the community a uniform look. However, if you build your new construction home without the restrictions of an HOA or community guidelines, then hiring an architect to design your house may be preferable, especially if you have specific design elements in mind. The architect's completed drawings will also play a role in securing your permits to build.
Setting a Budget for Your Home Design
Your new home is a blank slate, which is what nearly all homeowners like best about their bespoke construction. Choosing your flooring, paint, crown molding and doors are some of the most fun parts about building your new house. When selecting your interior, however, remember that budgets can easily escalate. Place firm boundaries in place for choosing your fixtures, and stick to them.
If your home is part of a planned community, certain interior features may be included in your builder's bid. Standard appliances, carpet and a base paint color and trim may be included in the package. There may be options for homeowners to select add-ons such as hardwood flooring or more intricate crown molding. Be sure to ask what's included in your bid, and plan your interior design budget around what isn't included.
Considering Resale When Designing Features
Selling your home is a matter of matching a buyer with their needs. If your custom home meets not only your needs but also the needs of a larger pool of buyers, it will sell faster several years down the road.
You'll need to evaluate your own intentions for your newly built home. If your goal is to build equity in a particular area, then matching comparable properties in your area, while putting a few special touches of your own in the space may be the best option. For example, incorporating “green” features into your home may boost your resale value. Depending on your budget, you may choose to use sustainable materials for the interior of your home, energy efficient appliances, solar panels or other environmentally sound initiatives.
If you're committed to more unusual design and have the wherewithal to build according to your complete preferences, then the sky may be your limit.
Do I Need Title Insurance for New Construction?
Title insurance protects you against disputes over the legal transfer of your land title. If you're purchasing a tract of land in a developing suburb, most likely the transfer of that property has already been legally covered. However, a real estate attorney may be able to give you more insight into whether you need to purchase title insurance in that case.
If you're buying land outside of a planned community, however, you may wish to purchase insurance for the title. Sometimes, if a plot of land has been passed down in a family, there may be a dispute over ownership. If the dispute over the sale of the land to you reaches a court of law, title insurance can help protect you and possibly recoup your cost of purchase.
Get a New Construction Home Inspection
New homes still need professional inspections after they've been built. Even if your builder has been completely transparent throughout the process, your homeowner's insurance application and any bank financing will go smoother with a thorough inspection. There may still be hidden flaws or defects, despite the builder's reputation.
If there are issues with wiring, plumbing or cosmetic mistakes, you can negotiate those repairs with your contractor before officially closing on the home. Home inspections typically run just a few hundred dollars, while fixing a serious defect after closing can easily reach into the thousands.
Choosing to build your own home, instead of purchasing an existing one, is a serious decision. Before you commit, take an honest look at your finances, credit, preferences for the outlay of the house and your plans for the future. It's an exciting adventure, but careful planning can help the process run more smoothly.