New Construction mortgage questions

[Lynnow]

Since homes are flying off the shelf, my husband and I are thinking about a new construction home in planned new communities where you choose your floor plan and upgrades. How does that work with financing?

Do you start paying the mortgage while they are building?

If not, what happens if financing falls through after it's all built? (our shouldn't but you never know what weird scenario may pop up). 

Will the interest rate remain the same 6+ months later after the house is built? 

Should we go with their lender? 

[Anonymous]

I am buying a new construction home and closing is on the 17th this month, below is based off my experience:

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@Lynnow wrote:

Do you start paying the mortgage while they are building? No, the builder still owns the lot/home until it's complete. Once it's completely built you close on the home just like any other home purchase.

If not, what happens if financing falls through after it's all built? (our shouldn't but you never know what weird scenario may pop up). you have to read your contract to see if you can get your earnest money deposit back if financing falls through. But they would just sell it to someone else.

Will the interest rate remain the same 6+ months later after the house is built? I assume this is dependent on the type of loan you choose but yes mine the interest rate is the same for entire length of the loan.

Should we go with their lender? You can shop around lenders, I went with builder's preferred lender because they offered $11k towards closing costs.

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[Lynnow]

VERY helpful thank you so much!!! 

[brk1971]

I'm in that process now, and learning tons.

In my case, the builder requires their lender to pre-approve you (along with the earnest deposit) to proceed. They do not (cannot), however, require their lender to be the lender you use for the mortgage. (They can make some concessions contingent on their preferred lender.)

Also, check your contract, as my deal had $7.5k in upgrades and $5k in closing costs included, but only $1500 of that was contingent on using their lender (the rest is in the deal from the builder regardless of the lender I choose). 

In my case, the lender had a very attractive rate (Conv @ 2.75% with no OF and no points). I used the loan estimate there to check other rates @ Navy Federal and Mutual of Omaha (through Costco), and presently am awaiting the loan estimates from each of them (both of them told me verbally that they would be better than the builder's lender - but I'm a "let's see the details" sorta guy).

As stated above, there's no mortgage (and no payment on the construction) during the build process, and at the closing date you're essentially buying a completed home. (It's not a construction loan as would be required for a custom build on your own lot.)

Couple tips I picked up from the process:

1. When customizing / upgrading... Be aware that paying for options doesn't always translate to improvements that will appraise at the value paid.

2. As far as deciding which lender to go with - in my case, in a different builder's office and in a different sales meeting a week earlier (that did not result in a deal), I was offered $6k in closing costs for using that builder's lender, but that lender charged a 1% loan origination fee and a 0.25% application and funding fee. Essentially, their offer was "we'll give you this great discount" but they were charging fees that cost me that same dollar amount. Had I not asked about lender fees for their lender, I would have left that meeting thinking it was a discount. So ask about lender fees when you talk to the lender, and compare apples to apples (e.g. your par rate with fees) amongst the lenders you get rates from.

Good luck!

[MauiMan85297]

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@Anonymous wrote:

I am buying a new construction home and closing is on the 17th this month, below is based off my experience:

---

@Lynnow wrote:

Do you start paying the mortgage while they are building? No, the builder still owns the lot/home until it's complete. Once it's completely built you close on the home just like any other home purchase. This is correct

If not, what happens if financing falls through after it's all built? (our shouldn't but you never know what weird scenario may pop up). you have to read your contract to see if you can get your earnest money deposit back if financing falls through. But they would just sell it to someone else.  If financing falls through (meaning you weren't approved for the loan then your earnest deposit is refunded back to you- you typically only lose it if you backed out for any reason

Will the interest rate remain the same 6+ months later after the house is built? I assume this is dependent on the type of loan you choose but yes mine the interest rate is the same for entire length of the loan.  You interest rate is locked the month or 2 before you close on the house and if it's a fixed rate it won't change for the life of the term.  You would just just pre-approved for the loan at first so the builder knows you can afford the house but rate wouldn't be locked in.

Should we go with their lender? You can shop around lenders, I went with builder's preferred lender because they offered $11k towards closing costs. Always get another quote as it doesn't cost you anything and doesn't hurt your credit score by having multiple lenders pull it as long as it's done 45 days from first pull.

I'm presently going through our 2nd new build and even though they were asking for you to go through their preferred lender giving over $15k in incentives I got them to accept my company (lender) to do the loan and still give incentives (They agreed). I can't legally do my own loan so my boss is doing it for me.

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Do you start paying the mortgage while they are building? No, the builder still owns the lot/home until it's complete. Once it's completely built you close on the home just like any other home purchase.

If not, what happens if financing falls through after it's all built? (our shouldn't but you never know what weird scenario may pop up). you have to read your contract to see if you can get your earnest money deposit back if financing falls through. But they would just sell it to someone else.

Will the interest rate remain the same 6+ months later after the house is built? I assume this is dependent on the type of loan you choose but yes mine the interest rate is the same for entire length of the loan.

Should we go with their lender? You can shop around lenders, I went with builder's preferred lender because they offered $11k towards closing costs.

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[Lynnow]

Thank you! Are you using a realtor? 

[brk1971]

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@Lynnow wrote:

Thank you! Are you using a realtor? 

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Yes, and this was vital to me learning my way through the deal.  If you don't already have one, I recommend using a referral service that has a commission rebate to hire the real estate agent. (Navy Federal has one that I'm using, but there are many others.)

[Anonymous]

@Lynnow 

Agree with everything that the other contributors said. We ended up using our builder's lender because they offered us the lowest interest rate.

We are currently using a realtor, but honestly, our realtor hasn't done much. I read through all the contracts and selected our upgrades without her. Maybe she'll come in handy in the next few weeks (tentative closing is 12/10), but I've found that the specialists who work for our builder are extremely helpful!  

[Lynnow]

Thank you!! Ok good to know! We do have a realtor and we will probably keep her just to be extra confident with our deal but I didn't know how new construction worked. We never really thought about new construction until we realized small homes built in 1990 would be almost $100k more expensive than building a 4 bedroom/3 bath since the market it so tight !!  It's crazy!! I guess We will take advantage of people being inpatient and not wanting to wait until a new construction is built lol  

[brk1971]

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@Anonymous wrote:

@Lynnow 

Agree with everything that the other contributors said. We ended up using our builder's lender because they offered us the lowest interest rate.

We are currently using a realtor, but honestly, our realtor hasn't done much. I read through all the contracts and selected our upgrades without her. Maybe she'll come in handy in the next few weeks (tentative closing is 12/10), but I've found that the specialists who work for our builder are extremely helpful!  

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This is a vital (and correct) point - the work done by the realtor is very minimal as compared to an existing sale... and this is why I recommended using a rebate based referral service. It's also important to note that if you go without an agent, the sale price is not cheaper. The realtor's commission is cooked into the cakemix, and becomes extra profit when you go without one. (In my case, the realtor commission is over $10k, and I'll be rebated just under $2k after the close of the house.) 

Good luck!