Buying a first house can be a great milestone – the entry into a brand-new house is even more exciting since nobody has ever lived in it before you. The smell of fresh paint, shining, brand-new tiles, and the incredible possibility of customizing every feature in the entire house, from countertops to floor plans, make many believe that this is a dream worth dreaming. This new-build process will give you a different impression altogether from placing an offer on an existing home when it comes to finances.
Purchasing a new construction property can be a little easier when you understand how to pre-qualify your mortgage loan and how the whole process flows. Identifying ways to simplify these processes is what we embark on together!
Step 1: Start by Pre-Qualifying Your Mortgage Loan
Before one can start looking for floor plans or sign contracts, one must first pre-qualify your mortgage loan. A simple pre-qualification gives one an estimation of what one can borrow; therefore, one may budget accordingly and buy confidently. It is the green light to financial readiness for entering into the home-building process. The lender will assess the borrower’s capacity, considering income, credit rating, debts, and assets.
Most builders would rather see their buyers pre-qualified, as it shows seriousness and financial readiness on their part. Besides, it allows them to lock in an interest rate early, which can really count since their house may not be completed for a couple of months.
Step 2: Choose the Right Mortgage for a New Build
For new construction home purchases, there are generally two loan types: a construction-to-permanent loan or a new home purchase mortgage. The former provides funds for construction and then converts to the regular mortgage once construction is finished, while the latter applies when the builder pays for construction, and you simply need a mortgage at closing.
If you’re confused about which type of financing is right for you, consult a broker for tailored advice. They will explain which type applies best to your situation, depending upon whether you’re building from scratch or purchasing a property finished by a builder.
Step 3: Keep an Eye on Construction Timelines
The reason buying a new construction often involves months of waiting for completion is that, over that time period, the mortgage interest rate and loan offer could very well expire. For that reason, lenders usually provide rate-lock options for a length of time, sometimes up to 12 months. Early in the game, it is prudent to find out about these options in case interest rates rise.
And, of course, stay on top of actual construction progress and any cost changes. Little things, like higher-grade flooring or fixtures, influence the final mortgage amount.
Step 4: The Final Mortgage Approval
Right before you realize your dreams of a fully completed home, there’s a good-faith verification by your lender for your other finances. This ensures there’s been no major change – such as taking on new debt or job shifts – since the time you were given first approval. Thereafter, you will enter into the mortgage, sign the papers, and get the keys to your new home!
All in All
Buying a new construction home can be exciting, but perhaps understanding the mortgage process will smooth the road even further. Thus, start early with your pre-qualification for your mortgage loan, and keep in constant communication with both your builder and broker. Good preparation will turn that blueprint into a reality, no longer just plans for your dream home!