How Much Cash Will You Need?
As you move through the buying and building process, you should be prepared with accessible cash for a variety of needs. First, you’ll need cash for an earnest money deposit to hold a lot and to show the builder that you’re a serious buyer. Later, the earnest money counts as part of your down payment.
When the home is complete, you’ll need money for the remainder of your down payment (the amount of your home’s total price that you pay up front and do not include in your mortgage). You may also need funds for additional fees and closing costs. You don’t want to forget to budget for moving costs. Once you’ve paid this, you also need cash reserves available for an emergency. Some lenders require cash reserves to approve you for a loan. Most financial planners recommend keeping three to six months of expenses in the bank as your emergency fund.
Earnest money deposit. “Your deposit may be bigger than the earnest money deposit you make on an existing home, but it can be anything you and the builder agree on,” On Q Financial’s Phyllis Casillas says. “Your deposit is then credited to your down payment or closing costs as settlement.”
Down payment. The size of your down payment depends on your loan terms and how much cash you have available to invest in your home. FHA loans in 2014 require a minimum down payment of 3.5 percent and conventional loans require a minimum of 5 percent to 10 percent, but these minimum amounts could change. Many financial planners recommend making a down payment of 20 percent because this eliminates the need for mortgage insurance, reduces your interest rate, and makes your monthly mortgage payments more affordable.
Closing costs. These can include an appraisal fee, survey, title insurance, and document fees charged by the lender. Often, your first year’s home insurance premium is paid at closing, which protects both you and the lender. Depending on your local market conditions, your builder may offer to pay all or some of your closing costs. Often, this incentive is tied to working with your builder’s affiliated or preferred lender. Other builders, such as Beazer Homes, offer incentives without requiring you to finance your home with a particular lender.
You can get an estimate of how much cash you’ll need to close your loan when you begin talking with the sales consultant and a lender. If you lack cash, some loan programs allow you to use gift funds from a family member. FHA loans allow your entire down payment to come from a gift as long as the gift is documented. Conventional loan programs require you to make at least 5 percent of your down payment from your own funds.
Although financial planners say you should avoid this, if possible, you can sometimes borrow from your retirement fund to make a down payment on a home. Consult your employer regarding your 401(k) or your investment advisor to make sure you follow the rules about borrowing from a fund and repaying yourself so that you avoid a tax penalty for early withdrawal.
Another option is to look into state and local home buying programs that offer down payment assistance. Most of these programs require you to take a homebuyer education class and are limited to first-time buyers or those who meet other requirements such as income limits. Some employers offer down payment assistance to their employees.
What’s Included in Your Home’s Base Price?
An important part of buying a new home is understanding what features are included in the base price of your home and what features are optional. Some communities separate the land price and the home price completely, so the price you’re looking at for a home doesn’t include the lot at all. And, as mentioned above, you may have to pay an additional premium for particular lots.
Keep in mind that what you see in the model home includes options. Most builders put upgrades in the model home, so that buyers can see what upgrades are offered. Be careful to separate upgrades from the standard features to know what you’re buying. The sales staff can help you identify which features and finishes are included and which are optional.
Typically, you’ll be given a list of optional features available in the community and a list of standard features when you visit a new home community sales office. These two items are among the most important pieces of paper you need during your home search because they form a basis of comparing different builders and communities. Which features are standard and which are optional could impact the final cost of your home.
Pricing and Negotiations
When you buy an existing home, it’s common to make an offer to the homeowners, receive a counteroffer, and then negotiate on the price and terms and conditions of the transaction before coming to an agreement. Good news! Buying a newly built home is much simpler than that. While this doesn’t mean that negotiations never take place, the process is more straightforward when you’re buying a new property.
Before we talk about negotiations, it’s important to understand how newly built homes are priced. Existing homes are typically put on the market at a listing price based on a comparative market analysis by a Realtor who looks at recent sales in the community of similar homes. The listing price for a resale home can also be influenced by how quickly a private owner wants (or needs) to sell the home and the level of motivation of the sellers. Builders also look at local current market values, but they also have other factors that go into pricing their homes.
“New homes are priced based on what the competition is selling for, which includes local resales and new homes,” WCI Communities’ Paul Erhardt says. “That gives you a range of similar homes that we use as a baseline and then adjust up or down based on the square feet of a particular model.”
Rather than relying solely on their estimation of the value of a home, new home builders can base their prices on the cost of the land, the cost of construction materials, labor costs, and marketing costs, and then add on a profit margin so that they can stay in business and build their next community.
“Prices evolve over time because as we start selling we see that people like one floor plan over another, so supply and demand kicks in to raise the price of that floor plan,” Erhardt says.
Builders need to make sure they haven’t sold too many homes too quickly because their customers might face construction delays if the builder can’t find enough qualified workers to keep up with the demand for homes. In a robust housing market, some builders may stop selling homes for a few weeks or months and keep customers on a waiting list until more homes can be built. In a slower market, you’ll find builders offering more incentives to keep their inventory moving.
In addition to maintaining the pace of sales, builders need to be cognizant of protecting the investments of their initial buyers as well as keeping appraisals in mind as they price their homes. This is why builders are far more likely to negotiate with potential buyers on optional features or paying closing costs rather than the base price of their homes.
“Builders want to keep the base price firm because the eventual sales price is recorded and will be looked at by appraisers,” Erhardt says. “Buyers will find the best deals on new homes when a builder wants to close out a community and sell the final few. On the other hand, they’ll also often get a good deal at the beginning because the first few buyers are pioneers who’re taking a risk about what the community will look like when it’s finished and are putting up with construction in the meantime.”
Even though most builders hold firm on the base price of their homes, you should stay focused on the total cost of your newly built home and what you’re getting for that price.
Finalizing the Contract
Once you’re satisfied that your negotiations are complete, it’s time to finalize and sign the contract. While contracts and purchase agreements vary from one builder to another and according to state regulations, there are standard parts of the contract that you should be certain to review carefully:
• Plans and specifications for your home. Be sure you see the appropriate floor plan and exterior you’ve chosen.
• Price. The base price should be specified on the contract; you can add your options later to the final price.
• Timeline. Your builder should provide an estimate of your completion date.
• Default provision. This should spell out what happens if you don’t fulfill your end of the contract by arranging financing or if the builder doesn’t fulfill their end of the contract.
• Notice provision. This should tell you how to officially communicate any problems with your builder.
• Dispute resolution. This section should explain how any disputes between you and the builder will be handled.
An attorney or Realtor may not be required in every state. However, if you want to feel more comfortable with the process, you may want to ask to see a sample contract before you sign anything and have an attorney and/or your Realtor review your contract before you sign it. Once the contract is signed, you’re ready to move onto one of the most enjoyable parts of the entire new home experience: designing your home.
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.