You may think that getting a mortgage is the same for all homes but that is not always true. There are several differences between buying a new construction home and an existing home. If you buy a new home that is part of housing development, your lender options, mortgage programs and closing costs may be impacted. For example, the home builder may offer special financing or incentives that are not available when you buy an existing home.
On the other hand, certain financing options such as FHA or VA loans, may not be available for all new construction homes, depending on the development and property type. Additionally, while you may save money on closing costs with a new construction home, ongoing costs such as property tax, special assessments and homeowners association dues (HOA) may be higher as compared to an existing home.
It is also important to highlight that the purchase price for a new home may be less negotiable. This means that an individual seller of an existing home may be more flexible on the property sales price which may enable you to get a better deal. While home builders are usually less flexible on the property list price, they may offer incentives such as discounted costs for amenities and other home finishes, so there may be a trade-off for home buyers.
Finally, the mortgage process when you buy a new construction home may be different than when you buy an existing home, especially if the home builder offers packaged financing with a preferred lender. You should always compare multiple lenders when you get a mortgage but working with the builder's lender may enable you to save money on your mortgage rate or closing costs. For example, the lender may waive the appraisal report fee, which reduces your closing costs. The preferred lender may also be able to close your loan faster, which can save you time and money. Home buyers should be sure to weigh the positives and negatives of working with a home builder's recommended lender to finance the purchase of a new construction home.
Below we compare the differences between buying a new home and existing home. Read on to understand the advantages and disadvantages of each and what you should look out for depending on the type of property you buy.
In many cases the home builder responsible for developing the project may have a relationship with a lender to provide financing to potential buyers. The lender attached to the project may offer special financing or require a low down payment
Borrowers should review the mortgage proposal offered by the lender attached to the project but also compare interest rates and fees with other lenders not associated with the project. Just because a lender is attached to a project does not mean that a borrower is required to use that lender when they purchase a property
If a borrower decides to use a lender not associated with the project the lender may require that construction on the property is completed before ordering the appraisal and finalizing the mortgage. If construction on the project is not completed, the builder may require that the buyer submit a deposit as well as a mortgage pre-approval letter indicating that the borrower has the financial ability to purchase the property
Whether a borrower is buying a new or existing home, you should always compare proposals from three-to-four lenders to make sure you are getting the best deal on their mortgage. Contact multiple lenders in the table below to shop for your mortgage.
One potential advantage to working with the lender attached to a new home development is that the lender may charge lower closing costs than a lender not associated with the project. In addition, the lender attached to the project may not require a new property appraisal and instead may rely on an the existing master appraisal that was created for the development. This can potentially save the borrower money and time when buying a new home as compared to an existing home.
Use our Mortgage Comparison Calculator to compare loans with different interest rates and closing costs
It is important to point out that even if the lender associated with the project offers lower closing costs, that lender may not offer the lowest mortgage rate so the borrower should always compare mortgage proposals from multiple lenders and weight the trade-offs between interest rate and closing costs
Not all home new builders accept all types of loan programs. For example, some builders may not accept FHA or VA loans, which allow borrowers to buy a home with a down payment of as little as 3.5% of the property purchase price. There are several reasons why a builder may not accept FHA loans but typically this is because the development has not been approved for FHA financing. If you are thinking about buying a new home make sure you understand the mortgage programs accepted by the project’s builder.
One advantage of buying a new home is that the home builder may offer incentives or allowances to potential home buyers. Incentives could come in the form of a price reduction or improved amenities such as hardwood floors or high-end appliances. New home buyers typically have the ability to negotiate to make sure the home they are buying comes with the amenities seek and should include these requests in the Offer to Purchase they submit to the builder when negotiating the property purchase price. In many cases it is easier to have amenities installed before buying a home than after buying a home which can be another advantage to purchasing a new home.
One of the downsides to owning a new home is that the ongoing costs such as property tax and homeowners insurance may be more expensive than for a comparable existing home. Some new home development projects require property owners to pay a special assessment tax, such as the Mello-Roos tax in California, to pay for public improvements such as schools, parks and roads in the area surrounding the development.
Review our explanation of Total Monthly Housing Expense
Borrowers should ask the home builder about special taxes and other potential costs such as monthly homeowners association (HOA) fees to make sure they understand the total monthly housing expense they will incur if they purchase a new home. Additionally, on average, new homes tend to cost more than existing homes but home price is determined by multiple factors such as location, size and amenities and the price you pay for a home is typically not influenced significantly by if the home is an existing property or newly constructed.
"Understanding Types of Homes." My Home by Freddie Mac. Freddie Mac, 2019. Web.