New Home 101: Building Your New Home, Part 3

Power tips on the need for financial stability between the approval of a mortgage and completion of your home.

Do you know what to do during the quiet period while your home is being built? What do you know about your warranty, escrow and deposits? We've got the scoop.

This article is the third part of a three-part series discussing the new-home building process. For part one, click here. For part two, click here.

Communicate often with your builder and your Realtor. By the time your home is under construction, you should have a thoroughly established relationship with your builder and know who to contact with questions. There’s no need for a daily check-in on progress, but you should periodically email or call your sales consultant or project manager to find out the status of the project. Some builders have systems that allow you to check progress on the home through their website. If you’ve been working with a real estate agent, discuss whether you or your agent should be responsible for following up with the builder.

There are several reasons to stay in touch with your builder, including the need to know when to lock in your mortgage loan. Your builder should alert you if there are any delays caused by the weather or materials and let you know if any of the fixtures or finishing products you chose need to be changed to keep construction on track. It’s wise for you to proactively check on this, too, as not all builders have a large staff that can consistently follow up with every buyer. You’ll need to have a firm idea of when your home will be complete to arrange for a moving company and to begin packing.

Decide when to sell your home. If you’re a first-time buyer you can safely skip on to the next point, but if you own a home now, you’ll need to develop a plan for it and moving into the new one. Most people prefer not to move more than once, so you’ll need to time your home sale carefully to closely match the settlement on your current home with the settlement on your new residence.

“I made the mistake of selling my home too quickly and I had to live with one of my kids for two months and have everything in storage,” Brookhaven at Johns Creek resident Leslie Finn says. “If you can plan it better, that would be best, but the market took me by surprise and my house sold faster than I expected.”

While your next home is under construction, you should begin preparing your current home for sale and start interviewing listing agents. Once you’ve chosen one, you should determine when to put your home up for sale in consultation with your agent. A lot depends on your local market conditions as well as the prognosis for how soon your home will sell. Sometimes you can negotiate with your buyers to rent back your home for up to sixty days while waiting for your home to be completed.

Maintain — or improve — your credit profile. In addition to communicating with your builder and real estate agent, it’s important that you stay in touch with your lender. Even though you’ve been preapproved for your financing, your lender will need to do a final credit check and re-verify your employment just before you go to settlement on your new home.

“A lot of buyers think that once they have a preapproval, their loan is a slam dunk, but you have to remember that those preapprovals expire,” says Paul Erhardt, senior vice president of homebuilding and development for WCI Communities. “You should stay in close touch with your lender the entire time while your home is being built, but especially about two months before it’s ready because you made need to do some extra paperwork before you can close the loan.”

It’s a little easier for buyers of existing homes to keep their credit profiles intact while waiting to go to closing because the typical time frame from a purchase option on a resale to the closing is thirty to sixty days rather than six months or more as it is for a new home.

“While you’re waiting, keep your status quo or improve your credit,” says Phyllis Casillas, with On Q Financial. “Don’t take on new debt and consult with your lender before making any big decisions or financial changes.”

If you do change jobs, talk to your lender about your situation and make sure that you’ll have at least two paystubs in hand before the closing on your new home. Don’t get a new car or even apply for additional credit before your home is built because this could lower your credit score or increase your debt-to-income ratio beyond the maximum allowable amount. Be careful to pay your bills on time, of course. And don’t close any credit accounts; that, too, could harm your credit score.

“You have a longer period of time to get in an even better position financially while waiting for a home to be built,” Casillas says. “You should use the time to save more for a bigger down payment or to replenish your cash reserves, pay down any debt, and live frugally so that you’ll be able to comfortably afford your new home.”

At some point during the construction period, you should consult with your lender on when to lock in your mortgage rate so final preparations can be made for your purchase.

What to Expect During Your Final Walk-through

Your final walk-through and home orientation is one of the most exciting days of the entire experience of building a new home, takes place just before your settlement day. Many builders deliberately schedule this a few days before your closing to have time to fix any minor details. If you hired a third-party inspector and any issues were found with the house, make sure that they have been addressed at your walk-through. You and your construction supervisor or perhaps the sales consultant will go over every inch of your home and identify any flaws that need correcting, such as a screw missing from a switch plate or a piece of trim that accidentally didn’t get painted. You’ll still be able to ask to have flaws fixed even after you move in, unlike with a resale purchase where you’re personally responsible for everything as soon as the closing takes place. The majority of builders want your home to be as close to perfect as possible before you take ownership. For most builders, it’s a matter of pride in their product to inspect the quality of their work before handing the keys to the new owners.

Some builders opt to have a pre-walk-through inspection of their own before the final walkthrough with their buyers.

“Our homeowner orientation session with the site superintendent takes place after we have someone who’s not been directly involved with building a particular house go through and mark any flaws that need to be corrected with blue painter’s tape,” says Tim Rini, vice president of Epcon Communities Franchising in Dublin, Ohio. “Once those flaws have been fixed, the buyers are brought in and given time to look through the house and given instructions about how to maintain and operate all the systems and appliances in the home.”

Your walk-through should take at least two hours or longer because it’s an opportunity to learn as much as you can about your new home.

What’s Your Warranty Worth?

One of the many advantages of buying a newly built home is that your appliances and systems are covered by a warranty for a particular amount of time. Be sure you register everything that needs to be registered for the warranty to be valid. In addition to manufacturers’ warranties on appliances, your builder will provide a warranty for the company’s work, too.

Buyers of existing homes can purchase a home warranty, but those warranties are far different from the warranties that come with a newly built home. Existing home warranties are usually purchased for just one year and can be renewable, but they only cover your systems and appliances and not your home’s structure. In addition, home warranties on an existing home have service fees and limits.

According to the Federal Trade Commission, new home builders typically provide a warranty for workmanship and materials for most components of the house for one year, including items such as siding, drywall, and paint. Coverage for HVAC, plumbing, and electrical systems generally is extended for two years and coverage for structural defects is provided for ten years.

“According to state regulations, all builders offer an implied warranty on their homes regardless of whether they also offer a written warranty,” says Emily Portocarrero, new home marketing manager for 2-10 Homebuyers Warranty. “The implied warranty means that builders are held responsible for repairing their work for a certain period, such as ten years. Without written documentation, homeowners must go to a legal resolution of a dispute if the builder doesn’t live up to the implied warranty.”

Understanding Escrow and Deposits

In addition to reviewing your warranties and keeping an eye on the progress of your home’s construction, you’re likely to have a financial obligation during the period your home is being built. While every builder is likely to have a slightly different way of handling the financial side of buying a home, most require at least one deposit prior to the settlement.

When you buy an existing home, you typically provide an earnest money deposit when you make an offer. That deposit is held in escrow until the closing date, so that if the transaction falls through, you can usually get the money back depending on the circumstances. If you end up buying the house, your earnest money deposit is credited toward your down payment.

When you buy a new home, you usually make an initial deposit for $1,000 or so to hold a lot, says Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts. “After that, you make another deposit of 3 percent to 5 percent of the sales price when you sign the purchase agreement. All of those deposits go toward your down payment,” he says.

According to Koss, some builders may require an additional deposit from buyers who choose numerous options. Some builders require deposits at several points during the construction process.

“You’ll find that a lot of builders do things differently, but basically, most have a graduated plan like ours at Fulton Homes,” Dennis Webb says. “For instance, on a $300,000 home, we ask for $1,000 at the initial contract signing, of which $500 is refundable if the contract is cancelled within ten days. Then we get 1 percent ($3,000 in this case) when the buyers choose their structural options because that’s when we apply for the permit and establish the footprint of the house. We ask for 1 percent more when they make their choices at the design center and 1 percent again after the framing, which is usually about six weeks before the closing.”

For more expert advice on buying and building a home, check out the free eBook download of New Home 101: Your guide to Buying and Building a New Home at 
NewHomeSource.com.

Michele Lerner is an award-winning freelance writer, editor and author who has been writing about real estate, personal finance and business topics for more than two decades. You can find her on Google+.

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