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What You Need to Know About Buying a New Construction Home

Maurie Backman

Our Mortgages Expert

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When my husband and I set out to buy a new construction home 11 years ago, we knew the process would be much different from buying a regular house. After all, we were buying a home that still had to be built.

The upside was that we had the option to customize our home's interior to suit our needs and tastes. For example, we were able to sneak an extra full bathroom into our downstairs and choose everything from flooring to countertops to wall colors.

The downside, however, was that we had to jump through some extra hoops to get our offer approved and qualify for a mortgage.

If you're buying new construction, you may need to do the following, just like we did.

1. Get pre-approval

Getting pre-approved for a mortgage isn't always necessary when you're buying a home, but if you're buying new construction, expect to take this step.

A pre-approval letter is proof that you're qualified for a certain mortgage amount, at least in theory. To be clear, getting pre-approved doesn't guarantee home loan approval. But if your financial circumstances don't change for the worse between getting that letter and closing on a mortgage, you shouldn't hit any snags.

In our situation, we had to present a pre-approval letter from our mortgage lender before our builders would start working on our home. After all, our builders were customizing the property to our specifications, so they needed reassurance that we were viable loan candidates who'd be able to purchase the home once it was complete.

2. Get conditional approval

While my husband and I didn't need conditional loan approval to move forward with our new construction purchase, it's a step some builders may require.

Conditional loan approval means that your application has gone through the mortgage underwriting process and that the loan is approved to close, provided certain conditions are met. Those conditions might include remaining employed as of your closing date or having your home (once completed) appraised for a certain value.

The good thing about conditional loan approval is that it's not really more work on your part. You'll need to provide certain documentation to your lender for an underwriter to review, like bank statements, pay stubs, and copies of your recent tax returns, but you'd need to take that step to close on a mortgage anyway.

3. Put down 20%

It's possible to buy an existing home without making a 20% down payment. But when you buy new construction, you may need to put down 20% or even more.

When we bought our home, my husband and I were required to put down 20% on our home's purchase price, even though we both had excellent credit scores. This was required to give the builders more of a guarantee that the deal wouldn't fall through.

In some cases, you may be able to make a smaller down payment on a new construction home, but check with your builder or real estate agent before getting your heart set on a property nobody's lived in before. If you can't come up with that 20%, you may have to move on.

Buying new construction has its pros (features you can handpick yourself) and its cons (potential construction delays and related stress). If you're interested in buying this type of home, talk to your builder and find out exactly what's expected of you so there are no unpleasant surprises along the way.

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