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New Home Construction

There are many reasons you might want to buy a new construction home. If you’re looking in a hot market (and who isn’t these days?), you may want to skip the hassle of open houses and the possibility of getting caught up in bidding wars with other prospective home buyers.

You might desire a high degree of control and input on the design of the home and materials used, and want to collaborate with a builder or architect of your choosing.

Buying new also equals built-in energy efficiency — better insulation, windows and appliances — and other up to date amenities, such as a home office for remote work.

Speaking of amenities, more often than not, new homes are built in planned, or “master”, communities, so you’re buying into a lifestyle and the amenities that go along with it, like clubhouses, pools, playgrounds and tennis courts. Every planned community is different, but what they all have in common is the social coherence that comes with living in an intentionally defined community.

The flip side of buying new is the price tag. According to Zillow, the median a brand new home sold for $400k, while the average resale home sold for $354k. However, not all new homes are more expensive than resale homes. If you’re OK with builder-grade finishes and appliances and don’t want anything super custom, it could be cheaper to buy in a planned community, where builders typically take advantage of volume buying to lower material costs.

Whether you want to buy land and hire an architect to realize your unique vision, or you just want to pick from one of several design choices in an amenities-rich planned community in a good school district, you’re probably going to need a new home construction loan to finance it.

So how do home construction loans work?

A new home construction loan is a little more complicated than a conventional mortgage. Construction loans are short-term, and can cover the cost of construction only or automatically convert to a regular mortgage on project completion.

During the construction phase, funds are disbursed by the lender directly to the builder in a series of installments, known as “draws”, which are tied to project milestones. You’re only expected to make interest payments on the money drawn by the builder while the home is being built.

Construction loans usually have variable rates that move up and down with the prime rate (some lenders offer a long-term rate lock option), and those rates are typically higher than traditional mortgage loan rates.

Your lender approves the builder’s plans and determines the draw schedule. Draws are typically made at the following stages:

  • Delivering the plan, pulling permits, and pouring the foundation
  • Framing out the house
  • Installing drywall, siding, windows and doors
  • Installing HVAC systems, electricity and plumbing
  • Installing interior trims, cabinets, countertops and flooring
  • Completing construction

In most cases, the lender has an inspector check the house at each stage of construction and makes additional draws after verifying the completion of a project phase.

Types of new construction loans

Below is an overview of types of new construction loans that may be available to you. It’s best to consult with your realtor and lender to find out if a particular type of loan is available and if you would be eligible for it.

Construction-Only Loan

The construction-only loan provides the funds to complete construction of the home and leaves you responsible for either paying the loan in full at maturity (typically within a year) or obtaining a mortgage to secure permanent financing.

Construction-only loans generally require a smaller down payment. This loan is a good choice if you don’t plan on living in the home post-construction.

The downside to this type of loan are that you’ll have to pay closing costs twice if you’ll need a mortgage to pay off the home. You’ll have to reapply with updated financials, so this type of loan makes sense if you’re confident your financial situation won’t change in the time it takes to build the home, which could be upwards of 15 months.

Construction-To-Permanent Loan (single close)

A construction-to-permanent loan, or single close loan, automatically converts to a long-term mortgage upon completion of the home’s construction. You fill out one application and pay closing costs only once. You’ll typically only make interest payments on money drawn during construction, and then start making full payments once it converts.

End Loan

Not all lenders offer construction-to-permanent loans. Some require a second closing to move into the permanent mortgage, also known as an end loan. You’ll hear this term used to describe the mortgage you use to pay off a standalone construction loan.

FHA New Construction Loan

Federal Housing Administration loans allows borrowers with lower credit scores to roll the costs of building or renovating a home into an FHA mortgage. (Note that with any FHA loan, you must pay mortgage insurance premiums.)

VA New Construction Loan

VA construction loans are backed by the US Department of Veterans Affairs. For many veterans, it’s easier to qualify for a VA construction loan than a regular construction loan. The credit requirement is less stringent and you don’t have to make a down payment.

USDA Construction Loan

The US Department of Agriculture administers construction-to-permanent loans for low- to moderate-income borrowers looking to build a home in an eligible rural area.

Renovation Loan

A big renovation project (over $35,000) may be financed with a construction loan. The advantage of financing a fixer-upper project with a construction loan is that you’ll generally pay a lower interest rate and have a longer repayment period than if you took out a personal loan or a home equity line of credit.

Owner-Builder Loan

If you happen to be an experienced, licensed contractor and are willing to make the time commitment, you can apply for an owner-builder loan. These can be one-time close construction loans.

How do I get a new construction loan?

With a conventional mortgage, the borrower’s home is the collateral. With a new home construction loan, the lender doesn’t have the ability to foreclose on the home should the borrower default, so these loans are considered riskier.

In addition to vetting you, your lender will be vetting the contractor you have chosen to work with, and monitoring the project’s progress. For these reasons, construction loans tend to have tougher application requirements, and not all lenders offer them.

Here’s what lenders are looking for in the approval process:

Credit score –  Construction loans tend to require a highercredit score than conventional mortgages. The minimum credit score is 620-680, depending on the lender. For FHA loans the minimum is 500 if paying 10% down or 580 if paying 3.5% (for HUD-approved renovation projects).

Debt-to-income ratio – The general requirement is that your debts should total no more than 45% of your income, the lower the better.

Down payment – The down payment on conventional construction loans is generally between 20% and 30%, but can be much lower for government-backed loans. FHA construction loans, for example, have a minimum down payment of 10%, or 3.5% for HUD-approved renovation projects. VA constructions loans don’t have a down payment. USDA-backed loans have a minimum down payment of 10%.

Builder approval – Lenders are looking for a licensed contractor with good cash flow and a solid track record. They’ll also typically review and approve the construction contract between you and your contractor.

Project and construction approval – Expect to provide your lender with a ton of documentation and timetables.Your lender must approve all of your contractor’s plans, and the plan must comply with building and zoning codes in your area. A home appraiser will need to review the specs to decide the home’s value, which determines the maximum amount of your loan.

Pro tip – It’s not unusual for builders to require you to be pre-approved by their preferred lender. This assures them that the deal won’t fall through.

Frequently asked questions

When do I have to start repaying the loan?

For both construction-to-permanent and construction-only loans, you only pay interest during the building process. You start repaying the loan once it has converted to a permanent mortgage.

How much is the down payment?

Down payment varies from lender to lender but is typically between 20% and 30%, depending on your credit score and what type of loan you are applying for. VA construction loans, for example, don’t require a down payment.

Do I make the down payment upfront or when it’s converted to a traditional mortgage?

Down payment is made upfront.

What happens if I change my mind / don’t like the home after it’s built / the work is sub-par / not up to code, etc?

The contract you sign with the contractor will determine if and when you can get your deposit refunded. Your agent can make sure a review period is written into the contract. The contract should include a specific completion date, but know that many builders have provisions that allow for some wiggle room in case materials or permits cause delays.

Does a new construction loan cover home furnishings?

New construction loans do not cover home furnishings. However, the purchase of new appliances that will become permanent features of the house can be included.

Do construction loans cover the design phase of home construction?

Construction loans do not typically cover the design phase. This is why it’s wise to get preapproved before you commission an architect or builder to draw up plans, which can be costly.

Mediterranean villa-style new home construction with swimming pool
New construction home in North Central Florida

New construction communities in Gainesville

Gainesville has a variety of master planned communities in development, with many new construction homes move-in-ready or very near to being so.

Grand Oaks is a Weseman Builders Community new construction neighborhood in the Southwest Gainesville area. These Craftsman-style homes by some of the most trusted names in local building feature designer selections, energy-efficient appliances and spacious floor plans. Homeowners and friends will enjoy ample green space and access to a community pool with a covered pavilion. Markets West, a neighboring mixed use development on Tower Road.

Oakmont is Gainesville’s newest luxury development, bringing sophisticated resort-style living to Alachua County. Established in 2015, the vast grounds are tucked between Haile and Tioga on 550 acres, 45 of which are set aside as a permanent conservation area. Highlights include a leafy, relaxed setting, upscale amenities, and custom homes by esteemed local builders. Homes range in price from the $300,000s to over a million dollars, and vary in size from single family to one-acre estates.

The Town of Tioga in Newberry combines an urban sensibility with the comfortable pace and natural beauty of a small Southern town. New development within the community (phases 17 – 20) is slated for the area south of SW 8th Ave, between SW 136th and 131st streets. Tioga was named Best Smart Growth Community in the nation by the National Homebuilder’s Association and Professional Builder magazine, Best Community in Florida by the Florida Realtors group, and Best Neighborhood by Keep Alachua County Beautiful.

Open houses

New construction communities may require you to visit the showroom or sales office with your agent the first time you tour the property. If you’re interested in a new construction home or condo, let your agent take the lead in scheduling the showing. New construction real estate transactions can be tricky, so having an experienced agent is a must.

Contact Rabell for more information on new homes for sale

Ready to see what’s out there? Contact Rabell at 352-559-8820 to learn more about new homes for sale in our service area. We service Gainesville and the surrounding region, Saint Augustine, Tampa, and everywhere in between.