If you're considering building a new home, where do you begin? Follow this new construction outline to help make your experience hassle-free, cost-effective, and fun.
You have heard of putting the applecart before the horse? Well, that applies to new construction too. The first step is the least enjoyable, but also the most important. It’s financing. What you qualify for dictates how much home you can buy and what options to include. If you are paying cash, then you can get right to financing the construction of the house with your builder.
1. Preapproval for the mortgage.
a) Contacting a mortgage loan officer will be the first call you make. Getting a mortgage today requires a lot of documentation and can be exhausting, depending on your financial situation. They will ask for various documents, so be ready. Here are the main ones:
b) Mortgage documents: last two years of federal tax returns with all schedules; last two years of W-2s—if you are self-employed and incorporated, include your business tax returns, too, if you are at least a 20% owner; last 30 days of paystubs; last 2 months of bank statements from all accounts, including 401Ks and investment accounts, with all pages to them (if the first page says “1 of 8,” you need all 8 pages—and don’t use online register printouts because lenders won’t be able to use them); photo ID for all borrowers, such as drivers license or state ID. Depending on your information, the lender might require additional documentation—this is to be expected.
c) The lender will need to pull your credit report as part of the process, and this document is considered the main component in determining your interest rate. Other factors are down payment and income.
d) After getting your information, the lender will determine the maximum loan amount using Fannie Mae, Freddie Mac, FHA, and VA guidelines. Some states and local communities also offer first-time homebuyer assistance with down payment and interest rates.
e) Once you are preapproved for the mortgage, do you need a construction loan? That’s where your builder comes into the process.
2. Finding a builder using Hoodle:
New construction homes are built by custom home builders and production home builders. The difference is somewhat simple—custom home builders will build your home exactly the way you want it within building codes and local covenants and restrictions. They will build on your site or a site they own. Some custom builders might own one to all the lots in a subdivision, too. A production builder owns the subdivision, has model homes for you to tour, and only gives you options that are limited to nonstructural selections, meaning they don’t move walls. Then there are the semi-custom home builders, who work from their set of designs and will give limited options of moving walls and adding rooms. All of these types of builders have their niche to serve the market they are in. Price ranges will vary from the entry-level condo or townhouse (called “attached homes”) and single-family detached homes to the luxury attached and detached homes.
Go to www.hoodle.com and sign in as a buyer, and start your search for your dream home.
3. Getting a construction loan:
Do you need one? That depends on your builder. Custom home builders vary in business operations. A production builder is the only builder in a subdivision and does their own financing so you don’t have to. Custom home builders might finance themselves or might require you to get the construction loan. Either way, you are paying the cost. The difference is you are liable for the loan to the bank and have to qualify for it. Here’s the process:
a) Your builder will be able to introduce you to a bank they have used and recommend, or they might have a relationship with a bank that does their construction loans. The bank will want all the same information that you gave for your mortgage, as well as details of the house you are having built, including all plans and specs. They will have an appraiser give an evaluation based on this information so the bank can determine if the loan is viable to take the risk.
b) How does the construction loan work? The bank will need to use the land as the collateral along with the home being built, so the bank will have a closing to sign documents, and a lien is put on the land. There might need to be a payout to pay for the land as well as a payment to your builder for work completed (“soft costs”), such as work done by the architect or surveyor. There will be about five payouts (draws) from start to finish, but this can vary depending on your project and the needs of the builder. The builder will produce a document called a “Builders Sworn Statement” that the bank needs to track the work completed. The bank will have an inspector go to the job site to make sure the work has been completed for the requested draw. This will happen for each draw until completion.
c) Construction loan costs. As with any loan, there are costs for doing the construction loan. Typical are title search, document preparation, underwriting, recording, loan service fees (also called points), the application fee for the appraisal and credit report. Fees will vary from bank to bank and state to state. And of course, there is the interest. You will be paying interest on a monthly basis of the outstanding balance. It is an interest-only loan, but you can apply the principal toward the balance at any time. And before the bank uses their money, they will use your money first. If your loan is based on you putting 10, 20, 30 percent or more down, you will be using your money first.
4. The building process
Designing your home with your builder or architect can take weeks or months. The more complex the design, the longer it can take, which typically means it will cost more money. To save time and money, have as much research done with your “wish list” as possible. Your selections for materials, colors, cabinets and flooring are essential for pricing. Your builder will give you deadlines for choices to keep the project on track. Your delays can cost you money, so be proactive and reactive.
Your prints are done, and you gave the builder the go-ahead to build. Your builder gets all the permits and approvals from the building, health, road departments (the list can go on). What happens next is an organizational feat of timing and trades.
a) Stake out the location of the house and dig for the foundation. The foundation is typically concrete, but a block foundation might be needed. When the foundation is built, the excavator will backfill. Keep in mind there are many other processes being done at the same time, such as plumbing, electrical work and insulating.
b) Lumber is delivered, framing begins, and the house starts to take shape. This is the rough framing stage. If there are to be any changes, now is the time to talk with your builder. Make sure your design is what you wanted. What you see on paper doesn’t always look like what you get in 3D. If you want to make changes, this is your chance—maybe. You might not be able to make a wall move or change a window size or location. Your builder will explain. Keep in mind that any changes you request will likely cost you unless a mistake has been made by the framing crew.
c) The framers are done, and it is now time for the electricians, plumbers, heating/AC and other specialists to do their rough installations. Your switch and outlet locations are done per the approved drawings, along with vents for heating and cooling of forced-air systems—all those important elements that occur behind the walls. Ask your builder if you can take pictures so you know where things are located for future reference. At this point, there will be an inspection from the building department to allow the next step of insulation.
d) Insulating is an important process that determines the energy performance of your home. Your climate has a requirement for minimum insulation per the IECC (International Energy Conservation Code). Check with your builder because this requirement is not enforced throughout the country. When completed, another inspection is required by building officials. Some builders might opt to do a blower door test at this time, too. This test is to discover where air leaks are robbing you of the energy you pay for.
e) Next comes the drywall and the exterior. Some builders will hang the drywall before the siding goes on to “load the walls” with weight so the siding won’t sag. If the house is all brick, this won’t matter because the brick will be stacked on itself with mortar. Drywall is dusty with all the sanding of the mud (joint compound), but the rooms take on a new look and feel for the size. When dry, a paint primer is applied before the surfaces get their final finishes.
f) Solid surfaces for floors and walls get installed, such as wood, tile, and stone. Then come the cabinets and interior trim and doors. The interior is now taking the shape of the final design.
g) Plumbing and electrical fixtures are going in after painting and staining are completed.
h) The installation of appliances, countertops, and carpeting reflects that the end is near. There will be a last coat put on the wood floors if you have site-finished wood floors. A lot happens in the last 30 days of construction. If part of your contract, landscapers are also at work, if weather permits.
i) Final inspections are done with the building department and a Certificate of Occupancy is issued—this means you can move in!
j) A final walk-through is scheduled to go over anything and everything with the builder that needs attention. This occurs either before closing or within an agreed time frame.
5. Closing on your mortgage.
Now that the house is complete, the lender must do their final inspection to make sure that your contract is satisfied. The terms of the loan are based on what is within the contract and can hold up the closing until complete. Some lenders will allow for an “escrow holdback” that instructs the Title Company to hold funds for work not completed. Keep in mind there is no reason to close unless everything is done, but there can be extenuating circumstances, such as weather or seasonal concerns like landscaping or sidewalks, as to when this will be. The debate will be who puts the money up for this, so try to have this clarified during the very beginning of the construction process.
6. After you move in.
It’s time to enjoy your new home and get adjusted to how it works. Keep a notebook of questions to ask your builder. Remember that you have a “builder’s warranty” that was disclosed to you in the beginning. They are typically good for one year but might last as long as 10. Keep a home file that you review periodically; make sure on the cover you note the time frame for your warranty.
This is a simple new construction outline describing the process of building a home. There are many more details involved, but all the large elements have been described here. Remember that your builder wants to ensure a smooth and enjoyable experience, so don’t be surprised how busy they are or how diligently they’re working to meet your completion date. Getting everything clear at the outset and setting proper expectations will make construction time pleasant and cut down on surprises.
Photo Credit: Cindi Rhinehart
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