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Buying a new construction home: Pros, cons, and how to finance it

Yahoo Personal Finance· Getty Images
Updated 5 min read

First-time home buyers may be surprised or even disappointed to learn that few, if any, for-sale homes look like the fabulous residences featured on home improvement shows. Worn carpets, scratched floors, missing window coverings, older appliances — for some homes, the list of cosmetic and functional defects can be long. Even when a home has been thoroughly cleaned and well-staged with colorful accessories, there's no disguising that it's been used by its current and any previous owners.

But what if you could buy a house that no one had ever lived in? There is, in fact, a way to buy a home in this pristine condition. Known as "new construction," this type of home is newly built and sold by the builder directly to the buyer. With a new construction home, everything is brand new.

There are two main types of new construction homes: production homes and custom homes.

Production homes are built alongside and roughly at the same time as other similar homes, usually in new-home developments. Builders of these homes offer buyers a choice of lots, floor plans, and design options. Though there are a limited number of options, they are still typically extensive, especially compared with existing homes on the market that don’t have the features you want.

A custom home is a one-of-a-kind project. With this type of home, you can purchase your own lot, work with your own architect if you want to, and choose everything in the home yourself, within the budget you set with your builder.

Like other types of homes, new construction homes come with advantages and disadvantages. These are important to consider when deciding whether to build or buy a house.

Fewer repairs. Because new construction homes are brand new, they typically need fewer repairs in the earlier years of ownership than older, existing homes. Fewer repairs can save homeowners time as well as money. Maintenance costs should be lower with a new construction home, as well.

Modern style. New construction homes typically feature the latest floor plans with desirable modern elements, such as open kitchens, larger closets, and more storage space. These elements, along with the home's newness, can be appealing to buyers and may help these homes hold their value, especially compared with older homes.

Fewer hidden problems. New construction homes are sometimes confused with remodeled or "flipped" homes, although the two types have little in common. New construction homes are completely new. Remodeled homes may be updated or refurbished, but they are not new. Remodeling can "paper over" defects that may prove costly to fix, and buyers might not notice these issues until after they move in.

Added costs. Building a custom home — especially on a scenic site in a rural location or on a steep hillside with a spectacular view — can bump up the cost of construction. If the site doesn't have access to roads, water, electricity, or sewage pipes, connecting to these services will make the process even more expensive.

Construction delays. You might find new construction homes that are finished or near completion. More often, though, these homes aren't ready for buyers to move in right away. Building a new house can take six months or longer, and supply chain issues or unexpectedly higher costs for materials or labor can cause further delays.

Lack of landscaping. Many older neighborhoods have well-established trees, shrubs, and smaller plants that add to their appeal. New-home developments typically don't have much or any landscaping until most of the homes have been sold. Even then, trees may be sparse or small.

Ongoing construction. New construction homes may be close to lots where other homes are still being built. First-in residents will have to put up with the dust and noise.

Read more: What are land loans, and how do they work?

When it comes to financing a new construction house, there are some differences between getting a loan for a production home versus a custom-built home.

Production home financing. Getting a mortgage to purchase a production home is similar in most respects to getting a mortgage to purchase any other type of home. However, many production home builders have a close relationship with an in-house or affiliated mortgage lender. When such a relationship exists, the builder will likely prefer you to get your mortgage from the builder's preferred lender.

Buyers may be offered incentives — such as home upgrades, rate buydowns, or extended rate locks — to get a mortgage from the builder's affiliated lender. These mortgage lenders typically have more experience with new-home financing, which is a plus for both builders and buyers, but they may not offer the most favorable rates.

Custom home financing. Financing a custom home can be more challenging because fewer lenders offer this type of financing, and you could actually need more than one loan. For example, you might have to get one loan for the lot where your home will be built and a construction loan for the building costs. When your home is completed, you may be able to convert your short-term construction loan into a 15- or 30-year mortgage, or you might need to obtain a new, separate mortgage to finance your completed home. It all depends on what type of construction loan you get.

Buying a new construction home can be a fun and exciting home-buying experience. You'll have plenty of opportunities to choose what you want, and your home will be brand new.

A new construction home can be a great fit for home buyers, but it's crucial to know your options. See how new construction houses compare to other home types: