Buying a new construction home? 4 things to keep in mind

Buying a newly constructed house can be highly appealing. It’s clean in a way a previously owned home will never be, and as the original owner, you’re able to customize certain features.

At the same time, you may avoid costly home improvement maintenance associated with older homes. That said, newly constructed homes can present some pros and cons and a few surprises that might change your price range.

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1. Unexpected costs

From San Diego to Kansas City, and Washington, D.C. to West Virginia, if you’ve toured a model home and fallen in love with everything from fixtures to flooring, don’t get too excited to buy new construction.

"When purchasing a home pre-construction, the fine print matters," says Warburg Realty agent Christopher Totaro. "There is a base price for a home, and then there are upgrades such as kitchen cabinets, granite countertops, insulation upgrades and many additional options. It’s critical to understand the cost of the upgrades, as well as why an upgrade adds value to your quality of life, reduction in carrying costs and potential resale value."

Wondering what you can afford? Use an online mortgage affordability calculator to determine potential monthly payments.

Additional unexpected costs for house hunters include: utility hook-ups, landscaping, decking and fencing. Darren K. Proulx, strategic financing advisor at Real Estate Bees, adds that some newly constructed homes may not include appliances, and just because the home is new, buyers shouldn’t skip the inspection, which costs around $400, according to HomeAdvisor.

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2. COVID’s impact

The pandemic has caused the construction costs of custom homes to skyrocket within the housing market, notes Ruby Barnes, a real estate agent at Compass.

"In the COVID crisis, supplies went up as much as 50%," she says. "The builder cannot absorb this kind of costs, so just know this can impact the bottom line of your price."

As supply deliveries also have been delayed, many contractors have fallen behind schedule. This can leave new home buyers scrambling for a place to live until construction is completed.

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3. What’s covered by your home warranty

When you get a home warranty, you may assume it covers everything, but that's not the case, notes Karen Kostiw of Warburg Realty.

"Generally, only the structure is covered," Kostiw says. "Also, a home warranty from an independent builder is only good as long as the builder in business — if they go out of business, your warranty probably goes with them."

Proulx recommends completing warranty cards for each piece of mechanical equipment immediately. These are delivered to homebuyers during their walkthrough, he adds. While on that walkthrough, pay close attention.

"Typically, it is not likely that minor cracking to drywall, masonry, tile, slab or the foundation will be covered by a warranty," Totaro says. "Craftmanship, workmanship and imperfections are likely to have limited coverage, so it’s very important to speak up if you see something askew when taking the pre-closing walkthrough. Read and understand the warranty — ask questions if you do not understand something. Also, if something is verbally communicated, get it in writing."

Additionally, the Federal Trade Commission recommends understanding how to make a claim and how any disputes between you and the home builder or warranty company will be resolved.

4. The type of mortgage you will need

The type of mortgage borrowers need depends on the specific home buying situation and structure of the purchase.

"If the home is under construction, a traditional mortgage will not be an option until the home is complete and an appraisal can be done," Kostiw said.

If you’ve hired a builder, you may need a construction loan that converts to a mortgage at closing, or upon the issuance of a Certificate of Occupancy, notes Totaro.

"A construction loan will be paid out in increments based upon the completion of various stages of construction, and the completion will need to be verified and approved by the lender," he says.

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Also, home purchasing in a development may be financed in-house by the developer, or the lender with whom the developer has partnered on the project.

Borrowers may be able to find lenders that offer construction mortgages which allow them to make interest-only payments during construction. Or, they may pursue a construction-to-permanent mortgage that lets them lock in an attractive interest rate.

During the new construction home buying process, it's important to bear in mind unexpected costs, take time in researching the builder and also take advantage of home buyer resources. No matter if you're looking to build in Palm Beach, Los Angeles, San Antonio or Colorado Springs, there will be pros and cons to new construction that must be weighed properly before making a final decision.

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