Homebuyers who want modern touches and few maintenance worries may opt to purchase new construction or have a home built to order.
In mid-2024, the median price of a new home was $429,800, according to the U.S. Census Bureau. As homebuyers have found a shortage of existing homes on the market in recent years, new-home construction has worked to fill the gap and consumers may find builders offering incentives to choose new construction. You’ll want to understand the market and learn some of the lingo.
Understanding New Construction Homes
On the upside, newly constructed homes can come with warranty-backed electronics, energy efficiency, and high-end features.
But new construction isn’t without potential snags, such as construction delays and the mounting price of upgrades.
The type of new construction you choose will determine cost and ability to customize and may also affect your home loan options.
• Tract homes. These go up in a builder’s new development. The buyer chooses the lot and design features.
• Spec homes. These are move-in-ready homes, but the buyer still might be able to choose some of the finishings. It’s a good idea to understand the difference between standard property features and upgrades.
• Custom homes. A builder tailors a house to the buyers’ specifications on their land.
How Do I Buy a New Construction Home?
A first step is to get preapproved for a mortgage and hire a real estate agent. You’ll choose a builder, go over your desired home features, and sign the builder contract, which will include the anticipated timeline, the cost, and all other details.
Mortgage options for a tract or spec home are the same as buying an existing home: conventional or government-backed home loans.
Those who are building a custom home might use a construction loan for the build and then obtain a mortgage once the home is complete. There are, however, FHA, VA, USDA, and conventional construction-to-permanent loans, also called single-close loans.
Figuring Out the Costs of New Construction
How much does it cost to build a new house? For 2,500 square feet, it could cost $345,000, but of course, there are lots of variables, including location, the price of labor and materials, and your tastes.
For a spec home, it might be a good idea to look at comparables in your area. For a new build, HomeAdvisor suggests budgeting the amount each project of the home requires as well as the necessary time to build.
In normal times, expect to spend about 50% of your budget on materials, HomeAdvisor says.
Buying a staged model house? The upgrades are considered marketing costs, and the home may have been walked through many times. You might have lots of room to negotiate.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Pros and Cons of Building or Buying a New Construction Home
Buying new has its pros and potential cons.
Pros
Everything’s New. Novelty can be a lure all its own. From a practical standpoint, new items signal less maintenance for years.
Additionally, with a from-scratch property, homebuyers may also be able to build their house on the precise plot of land that they want. Buying an existing home could mean having more neighbors nearby or less choice about the size or borders of the property.
Warranties. Appliances, roofing, and the HVAC system may be covered by manufacturer and construction warranties. Replacement or repair may be guaranteed for years, which can be a big relief when buying new construction as opposed to buying an existing home. Ask most homeowners about typical home repair costs. They are the opposite of fun.
Energy Efficiency. Homebuilding has been moving toward energy efficiency, or green architecture. Features like solar panels, treated windows, efficient lighting, and energy-saving appliances curb home energy expenses over the life of owning a home.
Reduced Homebuyer Competition. If a buyer opts to build a new home on an undeveloped tract of land, chances are low that a competing homeowner wants to build in that exact location at the same time.
Benefitting From Buying Discounts. A local contractor has ties to building supply companies and hardware stores. These business-to-business connections may translate into lower costs.
Cons
Land-Starved Locations and Zoning. The denser a community — think a big city or large suburb — the harder it may be to find land to build on. Moreover, local zoning regulations often regulate the size and type of new homes that can be built on residential lots.
Potential Building Delays. It takes 7 to 12 months on average for a contractor to build a house, and 12.1 months for an owner to, according to census data. That’s a significant wait, but building delays are fairly common and add to the bottom line. If a homebuyer needs to rent, for instance, while the house is being constructed, any delays could mean extra housing expenses.
New-home buyers can prepare for changes by touring similar finished homes in the community, researching the builder’s reputation, and speaking to residents. It’s also a good idea to talk with the builder about common construction delays and how unexpected costs are handled.
Negotiating Price May Be Harder. When working with a homebuilding company, negotiating may not be possible. Many builders attach a minimum price to the construction of a new home.
Upgrades Add Up. If wood floors, glass-front cabinets, and premium tile are must-haves, be prepared to pay for them. There is usually a “starting-from” price attached to newly constructed homes. Upgrades can add substantial costs to a new home.
Buying Tips for Newly Built Homes
Prepare to breathe in that new-house smell, but first lay the foundation.
Line Up Financing
When it comes to buying any type of house, getting prequalified is good. Getting preapproved is more serious, because you will have let lenders vet your finances and give you a specific amount you qualify for.
Lenders can also recommend the best kind of financing for a new build.
Hire a Real Estate Agent
Homebuyers wanting to make a new dream home a reality may want to find a good real estate agent. Here’s one reason why that’s important: The sales contact from the home construction company is hired to represent the seller (i.e., the builder or developer). A buyer’s agent can champion buyers’ interests, negotiate the contract, and answer questions.
Ask for Builder Concessions, Sign the Contract
Homebuyers aren’t likely to get a builder to slash a new home’s sales price, but they might be able to gain some concessions. Some builders may offer upgrades at a reduced price to incentivize a homebuyer to buy.
Upgrades may come in the form of a higher grade of carpet, granite countertops, a more advanced HVAC unit, or higher-end kitchen appliances. It doesn’t hurt to ask.
Once you’re pleased with your decisions, you’ll sign the builder contract to buy a spec home or start construction on a home.
The Takeaway
Newly constructed homes have obvious appeal, but they can come with potential delays and other drawbacks. Buyers who have their heart set on a brand-new home will find that financing often works the same way as it does for an existing-home purchase.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Can you negotiate the price of a new construction home?
Negotiating the price of a new construction home can be challenging as many builders set a minimum price. However, it might be possible to negotiate upgrades or concessions instead of a price reduction. Homebuyers can work with a real estate agent to help them negotiate with the builder.
What is a realistic budget for building a house?
A realistic budget for building a house will vary depending on the location, size, and desired features. In general, a 2,500 square foot home requires a budget of around $345,000, not including the cost of land. But cost can increase or decrease depending on the specific materials and finishes chosen.
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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