• Skip to main navigation
  • Skip to content
  • Skip to primary sidebar
  • Skip to footer

Realty Solutions Group

Service Beyond Expectations

SearchClose

How to Buy a House That Hasn’t Been Built Yet

Trisha and Dennis Rawlings, a couple in their early 30s, are moving to suburban Chicago and leaving their over-60-year-old first home in the St. Louis area behind.

“We were looking at potentially buying a house,” Trisha says. But in the area where they want to live, the options within their budget were limited to purchasing an older home or building a new one.

The couple loved the features of a modern, new-construction neighborhood with a pool, a clubhouse and excellent walkability. And taking out a construction loan and building a house means they’ll avoid the ongoing maintenance that comes with an older home.

With the supply of existing homes available to buy at “an all-time low” nationwide, according to the National Association of Realtors, homebuyers like the Rawlingses and others — including younger buyers — are looking at other options that include building a house. Here’s how to get started if you decide to build a home.

» MORE: How much home can you afford?

Finding a construction loan

“It all starts with your ability to be financed and what kind of budget can you establish from there,” says Dan Moralez, regional vice president for Northpointe Bank in Holland, Michigan. “You don’t want to be sold something by somebody and then the next thing you find out is that you don’t qualify.”

But not every mortgage banker or broker offers construction loans.

“Most mortgage people will go their whole career without ever doing one,” says Jerry Thomas, a mortgage loan officer in Farmington Hills, Michigan. “Another big group of (lenders) will do one and then swear they’ll never do another one again.”

There’s no easy way to find a construction lender. Ask for referrals from friends and family. Builders often have lenders they recommend.

Locking in the land

Getting a place to build a house is a major part of the homebuilding process.

“You don’t have to own the lot free and clear,” Moralez says. However, any equity you have in the land can be applied toward a down payment and closing costs.

Moralez says he has clients who want to “lock in a piece of dirt” so they can build on it in a year or so. Unfortunately, he says, the number of lenders who finance vacant land is significantly smaller than the number of lenders who will do a construction loan.

Buyers who are planning to finance the cost of the land and home construction simultaneously will need to keep this in mind when searching for a lender.

Qualifying and the down payment

It’s harder to qualify for a construction loan than for a typical purchase mortgage, Moralez and Thomas say. That’s because the bank is taking extra risk during the building phase, since there isn’t an asset to secure the mortgage.

Typical down payments are around 10%. Federal Housing Administration, Veterans Affairs and U.S. Department of Agriculture mortgage programs back construction loans and can allow some credit leniency, along with low — or no — down payments.

“If you can put 20% down and you have a 720 credit score or better, you know you’re pretty much going to qualify for everybody’s program,” Thomas says.

» MORE: Best lenders for FHA loans

Using a builder or DIY

There are two kinds of builders: custom builders and “production builders,” who construct a high volume of similar homes and work for maximum efficiency. If your house plan includes many special or unique features, look for a custom builder, since they specialize in building to meet client expectations, Moralez says.

Want to build your own home?

“More and more often, we’re saying no,” Moralez says. “Most lenders will not do a self-build project.” He says the few exceptions go to borrowers with relevant trade experience.

Moralez says borrowers who think they can save money contracting out the work themselves may be in for a disappointment. With the housing industry facing a shortage of skilled labor, you’ll likely pay more for workers than a high-volume contractor would.

Also, construction loans for a do-it-yourself project typically require higher credit scores and larger down payments. Terms and qualifications vary by lender.

Staying within a budget

Cost overruns are the biggest danger you could face when building a home, Moralez says. A builder’s bid sets cost allowances for lighting fixtures, flooring, countertops and other major features. An upgrade here or there can bust the budget, and you’ll have to make up the difference in cash, he says.

Research the costs of the materials upfront to help avoid making significant and expensive modifications along the way.

More from NerdWallet

    • Calculate your mortgage payment
    • Compare mortgage rates
    • Best lenders for VA loans

This article was written by NerdWallet and was originally published by The Associated Press.

Hal M. Bundrick, CFP is a writer at NerdWallet. Email: [email protected] Twitter: @halmbundrick.

The article How to Buy a House That Hasn’t Been Built Yet originally appeared on NerdWallet.

Realty Solutions Group was built around a simple but elusive concept: provide brokers and clients with the highest level of service in the industry through cutting-edge sales, marketing programs and a culture that values innovation, relationships and a strong local focus.

In less than 5 years, Realty Solutions Group is among the top independent brokerage firms in S/E Wisconsin.

As a locally-owned, independent company, Realty Solutions Group is deeply committed to supporting the communities and clients we serve. We are constantly evolving, but remain focused on that one simple idea behind our founding.

We are a full service brokerage with discounted commissions. We offer no long term listing contracts, a Performance Guarantee, Smart Seller Program and a Communication Guarantee. Contact us today and let us provide you with the very best real estate experience.

Powered by WPeMatico

Table of Contents

  • Finding a construction loan
  • Locking in the land
  • Qualifying and the down payment
  • Using a builder or DIY
  • Staying within a budget

Post navigation

« How to Buy a Home When Mortgage Rates Are Rising
Getting a Tax Refund? Use It on Home Improvements »
Search for:

Recent Posts

  • Don’t Let Rising Inflation Delay Your Homeownership Plans [INFOGRAPHIC] May 20, 2022
  • The One Thing Every Homeowner Needs To Know About a Recession May 19, 2022
  • How Homeownership Can Bring You Joy May 18, 2022
  • Why Rising Mortgage Rates Push Buyers off the Fence May 17, 2022
  • If You’re a Homeowner, You Have Incredible Leverage When You Sell Today May 16, 2022

Recent Comments

    Archives

    • May 2022
    • April 2022
    • March 2022
    • February 2022
    • January 2022
    • December 2021
    • November 2021
    • October 2021
    • September 2021
    • August 2021
    • July 2021
    • June 2021
    • May 2021
    • April 2021
    • March 2021
    • February 2021
    • January 2021
    • March 2020
    • February 2020
    • January 2020
    • December 2019
    • November 2019
    • October 2019
    • September 2019
    • August 2019
    • March 2019
    • February 2019
    • January 2019
    • December 2018
    • November 2018
    • October 2018
    • July 2018
    • June 2018
    • May 2018
    • April 2018
    • March 2018
    • February 2018
    • January 2018
    • December 2017
    • November 2017
    • October 2017
    • September 2017
    • August 2017
    • July 2017
    • June 2017
    • May 2017
    • April 2017
    • March 2017
    • February 2017
    • January 2017
    • December 2016
    • February 2016
    • 0

    Categories

    • Baby Boomers
    • Buying Myths
    • Demographics
    • Distressed Properties
    • Down Payments
    • First Time Home Buyers
    • For Buyers
    • For Sellers
    • Foreclosures
    • FSBOs
    • Gen Z
    • Generation X
    • Holidays
    • Housing Market Updates
    • Infographics
    • Interest Rates
    • Luxury Market
    • Millennials
    • Move-Up Buyers
    • New Construction
    • Pricing
    • Rent vs. Buy
    • Selling Myths
    • Senior Market
    • Short Sales
    • Time-sensitive
    • Uncategorized

    Meta

    • Log in
    • Entries feed
    • Comments feed
    • WordPress.org
    Search for:

    Meta

    • Log in
    • Entries feed
    • Comments feed
    • WordPress.org

    Go to mobile version