Protect your interests and discover how construction loans work.

It’s easy to understand the allure of buying a new construction home. You get to start with a clean slate, thereby avoiding the potential problems of aging homes and the previous owners’ attempts at repairs. There’s a certain comfort in having new electrical, plumbing and HVAC systems. Plus, the added convenience of having the latest technology. If all this sounds good to you, make sure you understand the process of buying a new construction home, including the financing.

Sales agents work for the builder

Sales agents play an important role in the sale of new homes, helping buyers understand the construction process, choose features, and navigate the way toward a beautiful new home. New home sales agents are some of the most helpful people you’ll meet. However, keep in mind that the role of the sales agent is to turn those shopping for a new home into homebuyers. They’re paid by the builder, often on commission. The upgrades they suggest will often help boost profits and ultimately their paycheck.

If you’re not experienced in real estate transactions, you may find it worthwhile to hire a buyer’s agent. A real estate agent can be enlisted to help make sure you’re getting the best deal. Enlisting a buyer’s agent won’t cost you anything because the seller—in this case the builder — will pay the real estate commission.

Understand the contract

Builders typically have a standard contract. This document has been drafted by the builder and their attorney. Keep in mind that it may not contain language to protect you. Hiring an experienced real estate attorney who can propose a contract that better serves you is a wise move.

In all cases, make sure you understand everything in the contract before you sign. This includes contingencies, cancellation rights, timelines, what happens in the event of a delay, specific building materials to be used and their cost, what the warranty covers and how long the warranty will last. Do not sign a contract until you understand all of it. If you have a co-signer, make sure the other person understands the contract, too. 

Hire an inspector

Buying a new construction home doesn’t mean you should forego an inspection, or even multiple inspections.

If the new home is complete, an inspector will ensure that all systems work as they should, drainage is correct and that the home is deemed safe.

If you’re part of the home building process from the ground up, inspections can be done at specific points, such as when the foundation is complete, walls are roughed in and when the plumbing and electrical systems are installed.

Financing for new construction

There are two stages to financing new construction: the building phase and after the home is complete. During the first phase, a construction loan covers cost. After the home is built a mortgage is put in place.

Residential construction loans are considered short-term loans that typically last one year. Rates on construction loans will be a bit higher than a mortgage due to a higher risk to the lender. Also, construction loans are paid out in several installments based on the construction timeline rather than a lump sum. A lender’s inspector will visit the site to verify building progress before releasing funds for each payment.

Some financial institutions treat the two phases of financing as separate loans. They charge an administration fee and closing costs for both the construction and mortgage loans. At Consumers, we help those building new homes save money with a single administration fee and one-time closing costs that cover both phases of financing.

Finance at a lender of your choice

Often, builders have preferred lenders they work with. They’re preferred because the builder has an existing relationship with the lender, and it helps streamline the financing process. While working with a builder’s preferred lender can provide ease, it may not provide the best option for you.

When considering any new home construction financing, look at all facets of the loan. The interest rate is just one part of the loan. You should also consider the loan’s terms, such as prepayment penalties and fees.

To get more details on a Consumers construction loan, or mortgage contact one of our Mortgage Loan Officers or call 800-991-2221.

Consumers helps more than 2,000 members finance land, first and second homes, and home improvement projects each year. We’d love to help you with a mortgage or home equity line of credit; contact us online or call us at 800-991-2221.