Understanding New Home Construction Contracts
Building a house from scratch can be great – you have an opportunity to watch the progress, you get to pick things out just how you want them, and everything is shiny and new. However, the contract and process to get there is quite different than buying a home at resale. Generally, each builder uses its own contract, which is much longer and somewhat different than the standard resale contract. Below I have outlined a few items to bear in mind when considering new construction.
- Expect higher deposits. Because the builder is building the home based on your specifications, the builder must have adequate security to ensure that you will actually purchase the home. In many cases, they are customizing the home to buyers’ specifications and want to be sure buyers are committed to purchasing the property. Therefore, the initial deposit required to enter into a contract for new construction is often greater than that required in connection with resale. Even if you will be financing your purchase using an FHA or VA loan with little or no down payment, you likely will still be required to post a security deposit when you sign the contract and be reimbursed at closing.
- Financing through builders comes with perks but can be costly. Builders frequently offer incentives to buyers who use the builder’s financing and/or title company. While the incentives are often enticing (i.e. the builder may pay your closing costs or offer free upgrades), the terms of the loan offered by a builder often feature higher interest rates or other negatives. Some buyers may consider refinancing with a different lender after closing, but prepayment penalties or the costs of refinancing may eliminate that possibility.
- Interest rates aren’t locked in until after signing a new construction contract. Banks often allow you to lock in your interest rate anywhere from 30 to 60 days prior to closing. Since the time from contract to closing on new construction is often six to eight months or even a year or more, you must sign the contract without knowing what your interest rate and monthly payments will be. While you may luck out with falling interest rates during that time period, they could also skyrocket, resulting in much higher payments than you initially expected.
- Selling an existing home is rarely, if ever, included as a contingency. Consequently, you may end up being responsible for two mortgages once you close on your newly built home if you haven’t yet sold your existing home.
Many people think that most contracts, including those for new construction, are “take it or leave it.” However, builders are often willing to negotiate certain terms with buyers. It is always worth taking the time to read through your contract and ask about terms that make you uncomfortable. On several occasions, I have assisted my clients with new construction contracts to ensure they understand the contract stipulations and negotiate with builders. Keep in mind that a builder may not be willing to make certain concessions, but you can at least be sure you are fully informed before signing on the dotted line.
Attorney Sarah M. Murray is a member of Gross McGinley’s Real Estate Group, assisting individuals and businesses in buying and selling property as well as negotiating new construction deals.