What to know before financing a new construction home

The process to assess your financial readiness to buy a newly constructed home is not too different from buying a resale home, at first.

The initial step will be to seek a preapproval for a mortgage from a lender to see what you can afford. Lenders will evaluate your income stability, credit history and savings for a down payment and closing costs. Homes.com has a mortgage calculator and resources that dive deeper into assessing your ability to buy a home.

Once you know what you can afford, you can start to look into different types of new construction homes. Spec and production homes are typically financed by the builder, so buyers don’t need construction loans and instead use a traditional mortgage once the home is finished.

Things get more complicated for semi-custom and custom homes.

Semi‑custom homes can go either way, depending on the builder: Larger builders often finance construction themselves, while smaller builders may require the buyer to take out a construction‑to‑permanent loan that covers land and building costs.

Custom homes almost always require the buyer to secure a construction‑to‑permanent loan, since the home is designed and built from scratch and builders rarely carry the construction risk. Overall, the more customized the home, the more likely the buyer is responsible for financing construction. Just as the lender assesses you and your ability to afford a home, it will need to evaluate the builder's ability to complete the project to approve a construction loan.

"First, lenders will need to assess the builder’s reputation and the full building plans to make sure their cost estimates are accurate," said Darren Robertson, founder and real estate agent at Northern Virginia Home Pro. "Next, they’ll have to account for all planned upgrades, which will add to the base price of the home and thus the loan amount. Then, they’ll need to develop a schedule for the release of funds as the project progresses; for new-constructions, loans are divided between construction and permanent costs, with funds released in stages."

Some builders have preferred lenders, which could make the process go smoother, but it's important to take the time to vet them on your end.

"There can also be benefits in terms of scheduling and communication," Robertson said. "A preferred lender will already be familiar with your builder’s process and expected timeline, so you can often avoid common bottlenecks like paperwork delays and enjoy a more efficient construction process."

Since the process to build a home can take months or years, some buyers might seek a rate lock on the interest they will pay on the mortgage.

"It’s a good idea for buyers to ask their lenders for an extended rate lock if their home is a few months from completion, with the lock ideally engaging after the loan application is approved but before any significant rate changes," Robertson said. "Buyers should aim to lock by the time the builder has provided an estimated closing date, especially if rates are rising, to secure a good position."

If you are set on buying and building new, there are some extra costs that you need to consider outside of typical closing, moving and agent fees.

Traditional mortgage:

• Used for spec and most production homes 
• Builder finances construction 

Construction‑to‑permanent loan:

• Typically required for custom homes 
• Required more often with smaller builders 
• Buyer finances both land + construction 
• More documentation + builder scrutiny 

Hybrid situations:

• Semi-custom homes may go either way depending on the builder 

Whether you are building from the ground up or buying a new production or "move-in ready" home, you might have some unexpected upfront costs that resold homes may not have.

"Typically, new construction homes do not come with window coverings, which can add up quickly depending on the size and number of windows, and of course, the material used," said Allison Freeman, a real estate agent with Premier Property Group in Panama City Beach, Florida. "Also, new construction homes are typically in new developments and do not have mature landscaping that offers enjoyment and privacy."

If you are customizing a new home while it's being built, whether spec, production, semi-custom or full custom, the costs to upgrade can add up. The more customization, the higher the down payment and deposits.

"Upgrade costs rank among the biggest surprises for new-construction homebuyers in my experience," said Robertson. "Commonly, builders will provide buyers with a base price for a home that doesn’t factor in features like premium countertops, floors or faucets despite having toured them around a model unit with these features on display, causing some confusion and frustration."

To prepare for the added costs, know your max budget and make sure the base prices are 10% to 20% below that.

"Buyers should establish a top budget before heading to the design center, as budgets can stretch there," said Ryan Wright, a real estate investor and CEO of The Investor's Edge in Salt Lake City, Utah. "Treat upgrades as if you are negotiating a second time."

• Window coverings for every room
• Landscaping and trees (many new communities lack mature growth) 
• Appliances not included in builder packages
• Lot premiums 
• Next‑level design upgrades (cabinets, flooring, countertops)
• Deposits at the design center 
• HOA initiation fees 
• Site prep if building on your own land (clearing, soil tests) 
• Utility connections for custom builds

With production, semi-custom and custom homes, there will be some opportunities to save some money or spend extra on a special amenity. Some upgrades will hold their value while others will depreciate at the resale value.

"Spend on the permanent, like structure, layout, ceiling height, windows and major electrical," Wright said. "Cut costs in finishes like lighting and cabinet hardware, which can both be replaced at any time for a smaller price tag. Regrets often center around having overspent on cosmetic upgrades rather than focusing on more practical elements, like a bigger garage or superior room layout. Focus on permanence, not aesthetics."

Assume living in the house will cause wear and tear, so spending top dollar on floors and cabinets might not pay off in the long run. Assess if this home is your long-term plan or a stepping stone to a bigger property.

"Choosing where to spend versus save should always be based around the long-term benefits for you and your family," Robertson said. "I always advise homebuyers to really think about how long they see themselves living in any particular home, where they’re likely to spend a majority of their time, what features will bring them genuine joy or comfort when it’s needed."

Even though you are building a new home, you could choose to renovate it down the line. Renovating a bathroom or kitchen is much easier and affordable than adding an extension or changing the ceiling height.

Splurge on

• Structural changes
• Layout adjustments
• Ceiling height
• Windows and natural light 
• Electrical and lighting locations
• Bigger garage or storage areas 

Save on

• Lighting fixtures
• Cabinet hardware
• Minor bathroom finishes 
• Some flooring types
• Cosmetic trim details

If you are building a home on a lot you bought, then you will have some extra work and costs to consider. There is more preliminary work to do before builders can break ground, including getting plans approved by local government, coordinating with utility companies and preparing the site for construction.

"Pre-construction, buyers should consider land preparation costs associated with things like clearing the lot, performing soil tests and demolishing existing structures, as well as utility connection costs," said Robertson. "During construction, factors like upgrades and potential delays caused by unavoidable events such as severe weather should be considered, while post-construction, closing costs, landscaping costs and costs linked to facade treatments must be accounted for."

Check with the local government, planning or zoning boards to see what approvals are needed before drawing up plans. Some neighborhoods have rules on the types and style of homes that can be built as well.

Construction typically takes the longest for custom and semi-custom homes. Production or spec homes are built faster because plans are already made. Customization usually draws out the process. Longer projects tend to be pricier, so plan for the cost of labor and services accordingly.

"For lengthy builds, it’s also important to leave room in your budget for potential price increases due to things like delays and labor, material cost increases propelled by inflation," Robertson said. "By separating costs across different stages and leaving some headroom for potential issues, buyers can help ensure the project stays affordable and that their finances remain in order during longer builds."

• Confirm local zoning requirements and submit plans for approval.
• Order soil tests, surveys and environmental checks. 
• Budget for land clearing, grading or demolition. 
• Coordinate with utility companies for water, power, sewer or septic. 
• Account for additional site prep: driveways, drainage tree removal. 
• Ask builder for projected labor and material timelines. 
• Leave room in the budget for weather delays or supply shortages. 

• Read builder contract, upgrade pricing and allowances. 
• Compare builder warranties (structural, systems, materials).
• Ask which items require deposits.
• Confirm design center deadlines and change‑order fees. 
• Verify builder’s insurance and licensing. 
• Ask about average build times and typical delays.

More on this topic:

• How to select the right new construction home type
• How to find the new home community that best meets your lifestyle
• Tips for finding the right schools