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How New Construction Mortgages Work

If you’re buying a new construction home for the first time, it can be both an exciting and daunting process, especially when you begin thinking about what kind of financing you need.

Obtaining a mortgage on a new construction home looks a bit different than getting a conventional mortgage for a pre-existing home. There are different circumstances involved with new constructions, so different types of loan products are designed to cover those circumstances – and it can be confusing and overwhelming if you have never been here before.

We at Lowder New Homes want to make your buying experience as anxiety-free as possible, which is why we handle our own financing for the new construction process.

We have also compiled a short guide on new home construction mortgages, looking at how they work, from the different kinds of new constructions available, the loans designed for them, and the types of financing you’ll be looking at as a Lowder customer.

Table of Contents

Types of New Construction Homes

There are different financing options for new constructions because not every new construction home is the same. There are, in fact, three different categories of new constructions you should be familiar with.

Let’s break these down for you here:

1. Custom construction

A custom home is designed and built from the ground up. You typically hire an architect to design a custom construction and contract a builder to build it for you. While custom homes give the owner control over every last detail as far as customization and design choices, they can also be overwhelming because of the sheer number of decisions to be made – not to mention that these homes tend to cost a lot more.

2. Semi-custom construction

With a semi-custom home, you still have the opportunity to customize the home to your preferences. Still, the decisions are a bit more manageable because the original plans have already been drawn up. A semi-custom construction is built from the builder’s existing selection of architectural plans, and you have options to make alterations to the design and select from a range of features (e.g., fixtures, colors, flooring, cabinetry, energy-efficient options, etc.). You may still build from the ground up, but you save a lot of time and stress because you’re not starting the design from scratch.

3. Spec homes

A spec home is one that the builder has already constructed from their own set of designs, often with a range of popular features in the expectation that they will sell it quickly. You can think of a spec home as a pre-existing home that has not yet been lived in.

Which Type of New Construction Home is Right For You?

Among these three choices, Lowder New Homes offers semi-custom homes and spec homes. We have found that specializing in these types of home buildings gives our customers the flexibility they need to purchase a new construction home they will love without the extra hassle and cost of designing a custom home from the ground up.

Interested in buying a new construction home from Lowder New Homes? Browse our homes for sale and contact us today to learn more about the process.

Home Loans for New Construction

Now that we understand the three main types of new construction homes let’s talk about what kind of loans are needed to finance those homes.

First, it’s important to understand the difference between loans for existing homes and new construction homes. When you purchase an existing home, obtaining a mortgage is fairly straightforward because the home has already been built. With new constructions, financing becomes a little more complicated because the builder needs money to build the home before the homeowner can actually occupy it. To meet this need, lenders offer construction loans designed to fund the purchase of materials, the cost of labor, and other expenses needed to build the home itself.

New construction loans typically fall into one of two categories:

  • Construction-only loan. This is a short-term loan (usually one year or less) that funds the construction process and comes due once the house is completed – at which point it is either paid in full or refinanced into a mortgage.
  • Construction-to-permanent loan. This loan begins as a construction loan, then automatically rolls over into a conventional mortgage once construction is completed.

At this point, we must differentiate between a construction loan and a home loan for a new construction home.

While a construction loan finances the building of the home, a home loan for new construction is just like a mortgage for an existing home, but the timeline and closing experience is a bit different:

  • There is often a longer closing period if construction is in progress. Financing a new construction can be tricky sometimes because lenders only lock in the interest rate for a specified amount of time. If there are unforeseen delays during construction, the lender may not guarantee the interest rate.
  • A Certificate of Occupancy is required before closing. A Certificate of Occupancy is a formal document certifying that construction is complete and the home is ready to be lived in. The CO can only be issued upon passage of the final inspection.

As you can see, the lending process for a new construction home is a bit more complex, with more variables than you find when financing an existing home. For that reason, it helps to work with a lender that offers loans specially designed for new construction. Lowder New Homes has established positive working relationships with preferred lenders to help our buyers easily secure financing.

At Lowder New Homes, we are committed to helping our customers get into the home of their dreams at the most affordable rate possible. To that end, we partner with reputable lenders who specialize in new construction financing, and we offer frequent promotional offers and free upgrades whenever possible. Contact us today to learn more about buying a home with us.

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New Construction Mortgage FAQs

What kind of loan do I need – a construction loan or a home loan for new construction?

Technically, new construction homes need both types of loans — a construction loan for the building process and a mortgage loan to take occupancy. For custom and semi-custom homes, the construction loan may be taken either by the home buyer or the builder, depending on the circumstances and the arrangement. With spec homes, the builder takes out the construction loan because there is no buyer yet. With Lowder New Homes, you will only need to secure a home loan for new construction; we handle our own financing for the construction process.

When do I start paying my mortgage on a new build?

You’ll start making your mortgage payments approximately one month after closing, which happens when construction is complete, and you are ready to take occupancy. You will not be responsible for making any payments during construction because your loan will still be in process.

What are the benefits of choosing a builder’s preferred lender?

When you work with a builder’s preferred lender, you’re getting the advantage of a lender familiar with the specific needs of new construction homes, with loan products designed to accommodate longer closing timelines, etc. Also, builders can often negotiate with their preferred lenders for discounted rates or reduced closing costs.

Is it harder to get a mortgage on a new build?

Not necessarily, if you choose the right lender. Construction loans can be more challenging to get simply because the bank is taking a higher risk by lending money on something that hasn’t been built yet. However, if you are securing a mortgage loan on a new construction, there is no more risk than a mortgage for an existing property since you won’t close until the home is complete. That being said, it’s best to work with a lender who offers loans specifically designed for new builds.

Who pays the closing costs for a new construction home?

As with a pre-existing home, closing costs on a new construction home are somewhat open to negotiation. Standard policy is for the buyer to cover closing costs; however, sometimes, the buyer can negotiate with the seller (in this case, the builder) to absorb some or all of the closing costs. Additionally, builders often offer promotional rebates or cashback, which you can use to cover the closing costs.

Are closing costs higher for new construction homes?

Typically, yes, they are. The reason is mainly the cost of the owner’s title policy. The seller usually covers this cost in pre-existing homes, but the buyer is responsible for the title policy in new construction homes since there was no previous owner.

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