Buying a New Construction Home

Amanda Fallon
Amanda Fallon
Published on January 2, 2018

Once you’ve decided to explore purchasing a home, it can sometimes feel overwhelming to try and figure out where to begin on your own, and that goes for existing homes as well as new construction.  The good news is I’m here for you in either case!

Buying a new construction home is a very different process than buying an existing home, for many reasons!  As a home buyer, you want a Realtor who works with builders regularly and is very familiar with the process.  Read on to learn answers to the three most common questions I receive from my clients who are considering buying a new construction home.

Question #1: Can I have my own Realtor?

Just as it’s not the best idea to use the seller’s real estate agent when purchasing an existing home, it’s also unwise to default to the builder’s agent when buying a new construction home, and here’s why:

The seller or builder’s real estate agent has a fiduciary duty to their client, and they ultimately have one overriding aim: to get the home sold, and at the highest possible price.

A buyer’s agent, on the other hand, has a fiduciary duty to the buyer alone.  A good buyer’s agent seeks to advise their client of the market, compare and contrast different potential options for them, make them aware of any pertinent information, and ultimately to help them achieve the goal of homeownership at the best price possible for any given property.

See how the two duties conflict?  Regardless of how friendly, knowledgeable, and eager the builder’s real estate agent is, you absolutely need your own agency representation when buying a new construction home.

IMPORTANT: builders require that you have your Realtor present with you on your first visit to the model homes, or they will deny you agency representation altogether!

Instead of forgoing your own representation and communicating only with the agent that represents the builder, you’ll have your own representative who will go to bat for you in negotiating upgrades and extras where possible, being present with you and giving honest opinions during the inspection and final walkthrough, and keeping the builder accountable as needed — just make sure your Realtor is always with you on your first visit to any model homes!

Question #2: How much does it cost to have my own Realtor?

As a home buyer, you’ll be happy to know that you do not pay Realtor commissions! Your Realtor’s commission is not a closing cost for you, it is not wrapped into your loan amount, it is not pre-paid by you, and it is not paid out of pocket by you at any time! Yes, that’s right! When buying a new construction home or an existing home, you the buyer are not the one who pays Realtor commissions — the seller, or the builder does! Yay!

Real estate agent commissions are agreed upon before the home even hits the market. They are disclosed in the MLS. These fees are already expected to be paid by the seller or the builder of a home.

There is no additional cost to you, the buyer, to have your own Realtor represent you! Even if there were, I would highly recommend you have your own agency representation, but thankfully that is not the case.

Question #3: Do I have to use the builder’s preferred lender?

Many people are under the assumption that they must use the builder’s preferred lender as a condition of buying a new construction home.

Some builders’ agents use carefully-chosen words to make buyers believe this.

When buying a new construction home, the builder may require you to obtain loan pre-qualification from their preferred lender, but in the end, you can choose to borrow money for your new home purchase from whichever lender you choose.  Note: each purchase agreement will specify a timeframe in which to declare your lender of choice.  For some that is right away, and for others, I’ve seen as long as 5 months.

The builder’s preferred lender may offer incentives, though. They may offer to pay a portion of your closing costs or entice you with a credit toward design center upgrades if you choose to fund your mortgage with them.

When buying a new construction home, closing costs or other incentives offered by the builder’s preferred lender should be weighed against bids from outside lenders, with all things considered, including interest rate, points charged, and APR.

When asked for, the builder’s lender will provide you with a loan estimate that you can use to compare this lender’s offering against others. The Consumer Financial Protection Bureau offers a sample of the form, with explanations, on its website.

Your first step is to find your Realtor (me!).  After speaking with you, I will get you in touch with preferred local mortgage loan officers that I trust and have successfully worked with numerous times, and that have given my clients consistently great experiences.  After you speak with the mortgage loan officer and get pre-approved, we will have a very accurate idea of what purchase price you are approved for and what your monthly payment will look like at that price point.  Then we start narrowing down on new construction communities that may be a good fit for you!

A pre-approval is a necessary first step when considering buying a new construction home or an existing home, and needs to be done before stepping a foot into a model home or builder’s sales office.  There is nothing worse than falling in love with a home to then find out that you do not qualify to purchase it when property taxes and interest are considered. This happens all the time, sadly!

Note: online mortgage calculators do not calculate your PITIA correctly — in general they estimate using an interest rate and property taxes that are far too low, they default to a 20% down scenario, and most of the time they only show you the “PI” portion of the payment, and not the “TIA”. Also, those calculators have no way of knowing what your current debt-to-income ratios are or if you would even fit within FHA, VA, conventional, or jumbo guidelines.  Even creditkarma.com can’t pull a totally accurate credit score for you the way that a mortgage loan officer can.  Getting pre-approved from a licensed mortgage loan officer is the only way to have any kind of accuracy.

Walking into the model homes together with your Realtor & an outside pre-approval letter from a trusted loan officer means you will have the confidence to make an offer and move forward with buying a new construction home should you decide to, and that you are already ready to compare and contrast the builder’s preferred lender’s bid against the one you already have.

One more thing — most mortgage loan officers use a figure of 1.2% when estimating what your property taxes will be, in order to estimate what your total debt-to-income ratios will be, in order to give you a pre-approval.  That is industry standard.  However, when buying a new construction home, your property taxes will in most cases be closer to a 2% figure.  A shocking number of mortgage loan officers are not even aware of this fact, and it’s important that you work with a Realtor and mortgage loan officer who are extremely familiar with new construction as this can significantly alter the monthly payment and how much house you can afford.

I have had many clients who initially were most interested in buying a new construction home, ultimately decide to purchase an existing home, and in either case, it makes me feel like I have really done my job.  It is a critical part of my role as your Realtor to help you weigh the pros and cons of new construction vs. existing homes, and by giving you all the information and exploring all options, help you to confidently make the right decision for you and your family. For information on the home-buying process, read my Guide to Buying a Home.

Read my Tips for Touring Model Homes.

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