New construction financing issues to avoid

Ginger Dean

January 12, 2016

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

Buying a new home is a big deal. It's probably the biggest investment you'll ever make during your lifetime, so make sure you're getting the best deal possible. If you're buying a new construction home, you have a little bit of a different process to go through than buying a used home -- there are warranties that come with materials and possible conditions that need to be met.

Use these tips as guidelines to avoid any potential pit falls when it comes to financing your new construction house.

Never accept your first mortgage offer; always shop around

Many new development projects have a preferred lender. However, if you're not legally bound to apply for a mortgage with them it's a good idea to shop around to find the best rate. Ask about fixed and variable rate mortgages as well as the amortization period and refinancing options, just in case you need the option down the road.

What to know about new construction loans

Sometimes builders don't have all the financing they need to complete a project. Homes are built with funds provided by the buyer through a construction loan. Once the project is complete, the construction loan is converted into a conventional mortgage.

However, buyers need to pay interest on the construction loan when the advances are drawn, but the capital only needs to be paid back once it's converted into a mortgage. On top of all the other expenses involved with buying a home, can you pay the additional interest charges?

Always get a home inspection

It may seem a little redundant to get a home inspection on a new construction home, but it's a good idea. Although the builder has to follow municipal codes, you'll still want to have the structure and all it's working parts inspected.

There is an additional cost for a home inspection, but it's worth it because it could save you hundreds or even thousands of dollars later. In some cases you won't be able to obtain a mortgage loan without showing the bank the home inspection documents, so after your new construction is finished being built, have it inspected as soon as you can.

Don't sign a contract without reading the fine print

It might even be worth having a lawyer look over the contract to ensure you're protected in case anything goes wrong with materials, the budget, or the timeline.

If something goes wrong with the structure of the home or the materials, as the homeowner you have a limited amount of time to make a claim, otherwise the repair expenses will be out of pocket and that's money wasted. Go over your contract with a magnifying glass to ensure you understand all financial commitments.

Once you've got all this information in mind, you can decide

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