Buying a new home is more difficult than purchasing an existing residence. However if buyers understand the challenges of new home ownership they will be rewarded for their tenacity.
For starters, the application timeline can be far longer than expected and at times has taken as long as six months or longer. On an existing home the period from application to closing usually takes 30 to 60 days, but the timeline for a new home is less clear-cut taking anywhere from 15-180 days.
Sellers of an existing home generally dictate how much of a deposit is required at the sales contract signing. The more cash upfront the better but there have been incidences of as little as $500 holding a deal. Builders, on the other hand, want more and require buyers to put between 5-10% of the contract price before they will start construction.
Lenders like to see large deposits on new homes. This is because they have to go through a longer pre-approval process that means more work on their part. A pre-approval removes as much risk as possible from the builder’s shoulders and placing it on the buyers.
On the pre-approval side a major concern for new home buyers is rising interest rates. Smart buyers look for rate locks that guarantee the interest rate you end up paying will not be any higher than the day you applied for your mortgage. Lenders usually hold these rates for 30 to 60 days and if longer time is needed an extended lock can be purchased lasting 180 days. A rate lock should contain a float-down rider because if rates recede during construction the rate paid will also be lowered.
Another difference between the new and existing home process is the appraisal. On existing homes, the appraiser views the property and finds comparable sales to come up with a valuation. In the case of new construction, there is no house to appraise. The appraiser uses plans and specifications provided by the buyers and builder coming up with a value based on how the finished home will look at completion. Consequently, neighborhoods, streets and blocks make a big difference in the final valuation.
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