You finally found your dream home. After months of searching, you came across the perfect new construction by your favorite builder in the ideal neighborhood. Your offer was accepted, you’re nearing the closing date, and you can hardly wait to move in. But before you can officially call the place your own, you need to make it through closing day.
This exciting milestone can also make first-time homebuyers a little nervous. Closing costs seem complicated, and you might worry about budgeting properly for these fees. Not to worry! This complete guide breaks down everything you need to know about closing costs on new construction to keep you informed and prepared.
Types of Closing Costs Unique to New Construction
While closing on any home comes with costs, certain fees specifically apply to brand new construction. Builders tend to pass many of these expenses on to the buyer. Familiarizing yourself with these charges helps you budget accurately and avoid surprises.
Owner’s Title Policy
One of the biggest closing costs unique to new construction homes is the owner’s title policy. This title insurance protects the buyer if issues later arise over legal ownership of the property. On resale homes, the seller traditionally pays for title insurance. But with new construction, the builder transfers this cost to the buyer at closing.
Budget about 0.75% of the home’s price for the owner’s title policy. On a $500,000 new construction, you can expect to pay around $3,750 for this title insurance. Oftentimes, builders lure buyers by offering credits to cover this fee, especially if you use their preferred lender and title company.
Appraiser’s Final Inspection Fee
Lenders require an appraisal on new construction homes to confirm the value matches the sales price. Initially, the appraiser will perform a subject-to inspection while construction finishes up.
Once the home is complete, the appraiser must conduct a final inspection. This typically costs around $175 and gets billed to the buyer at closing. The lender won’t fund the loan until the appraiser verifies everything’s in order.
Final Survey Fee
Newly built homes don’t have existing surveys. So you’ll need to pay for an initial property survey out of pocket at closing. Surveys establish the legal boundaries and positioning of the house on the lot. They also show easements, encroachments, and other topographic details.
In most states, the final survey runs $450-$550. Builders rarely front this cost, even if you use their preferred providers. But some may be willing to credit a portion back to you at closing if asked.
New Construction Escrows
Escrows accounts set aside money to pay upcoming bills like property taxes and insurance. With new construction, estimating these escrows gets tricky.
Property taxes in particular cause confusion. Taxes get assessed based on the value as of January 1 each year. But new construction homes often won’t be complete by January 1.
This means lenders have to estimate taxes at closing based on the land value only. Once the home is finished, taxes get reassessed to include the dwelling value. The difference gets captured in your escrow account.
It’s not a huge cost, but can make your escrow payments higher than expected that first year. Be sure to budget a few hundred extra dollars for new construction escrow intricacies.
Tax Prorations
In addition to escrows, your closing costs include prorated property taxes. Local governments assess property taxes annually. So at closing, the buyer reimburses the seller for any taxes already paid for the remainder of the year.
For example, if you close in February, you’ll owe the seller 10 months’ worth of taxes to cover March through December. New construction prorations work the same way based on when you close during the year.
Again, because the home’s value usually changes after January 1, the prorated amount at closing may differ from your actual tax bill later on. It’s not a dealbreaker, but helps set expectations on closing day.
Miscellaneous Fees
A few other common fees crop up when buying new construction homes:
- HOA transfer – Covers admin costs to add you to the HOA rolls
- Working capital – One-time charge to fund HOA reserves
- Initial HOA dues – Prorated amount due at closing
Builders tend to pay HOA transfer fees, but the other two often fall to buyers. Familiarize yourself with the HOA fees outlined in the purchase agreement.
Popular Loan Types for New Construction
Several home loan options work for new construction financing. But some stand out as more popular choices among buyers. Understanding the key features helps you select the best mortgage for your situation.
Conventional Loans
Conventional loans are the most common loan type used by new construction buyers. These mortgages are issued by private lenders like banks or credit unions.
Down payments on conventional loans typically run 3-20%. You’ll need a good credit score and stable income to qualify. Interest rates are low and guidelines are more flexible than government programs.
First-time buyers often choose conventional loans. But you’ll pay private mortgage insurance if your down payment is under 20%. Conventional mortgages can get you favorable terms with less red tape in many cases. Just be aware of potential PMI costs.
FHA Loans
FHA loans are government-backed mortgages popular with first-time homebuyers. These programs only need a 3.5% down payment and have looser credit requirements. You can qualify with a credit score as low as 580 and higher debt-to-income ratios.
Instead of PMI, FHA loans charge an upfront mortgage insurance premium (MIP) and ongoing monthly MIPs. These premiums cost more than PMI over the long run. And you’ll pay MIP for the full loan term no matter how much equity you have.
But lower down payments make FHA loans accessible if you’re short on cash. Just understand the tradeoffs with higher mortgage insurance rates before choosing this option.
VA Loans
VA loans incentivize homeownership for military families. Eligible buyers can purchase a new construction home with zero down payment.
These mortgages don’t charge private mortgage insurance either. Guidelines around credit scores and debt levels are also relatively lenient. And VA loans offer favorable terms, like no penalties for early repayment.
VA loans work best for service members, veterans, or qualifying spouses. Surviving spouses of veterans may also be eligible. But these mortgages come with hefty funding fees, so compare total costs against conventional programs too.
USDA Loans
USDA loans promote homeownership in rural areas. No down payment is required on these government-backed mortgages. USDA also sets flexible credit and income requirements for approval.
Closing costs may run slightly higher with USDA mortgages in some cases. And you’ll pay an upfront guarantee fee of around 1.5% of the loan amount. But this one-time charge often beats ongoing PMI or MIP on conventional and FHA loans.
Just note USDA mortgages are geographically restricted based on population density in the home’s area. New construction developments in less populated locales could make good candidates for USDA financing.
Key Steps in the Home Buying Process
Beyond picking the right mortgage, you’ll walk through several key steps during the new construction process. Here’s what to expect on the road to closing day.
After getting preapproved, you’ll make an offer and negotiate the purchase agreement. During the construction phase, you’ll choose finishes and make custom selections for cabinets, flooring, fixtures, and more.
Once the home is move-in ready, you’ll conduct a final walkthrough inspection before closing. This ensures the builder completed everything to your specifications.
At closing, you’ll review and sign your closing disclosure statement. This detailed form itemizes all closing costs and fees for both buyer and seller. You’ll also wire your down payment and closing costs to the escrow company.
After funding, you’ll receive the property deed and keys! Then it’s time to start moving in and decorating your new dream home.
ALTA Settlement Statement
One of the most important documents you’ll review is the ALTA settlement statement, or closing disclosure. ALTA stands for American Land Title Association.
This statement breaks down all credits, adjustments, and charges line-by-line. You’ll see the sale price, total loan amount, seller credits, prorated taxes, title fees, escrows, and more.
The ALTA provides a complete picture of what you owe at closing. Having this information ahead of time prevents surprises and helps you budget accurately.
When Closing Costs Are Due
Closing costs must be paid on the closing date in order to finalize the transaction. The title company or escrow agent will provide a closing cost estimate statement in advance detailing your total amount due.
You’ll need to bring certified funds like a cashier’s check or arrange a wire transfer to cover your closing costs and down payment. Personal checks are not accepted. Make sure to transfer the full amount requested – any shortage could delay closing.
With preparation and a clear understanding of fees, you can budget confidently and sail through a smooth closing process.
Can Closing Costs on New Construction Be Negotiated or Reduced?
When purchasing new construction, it’s possible to negotiate or reduce closing costs. Builders may be willing to cover some of the expenses, and buyers can negotiate with the seller or lender. It’s essential to communicate openly and seek ways to lower the overall costs. Fixing a loose dental bridge at home is not recommended.
Who Pays the Closing Costs
Closing costs are typically split between the buyer and seller on new construction deals. But in some cases, the builder picks up certain fees to entice buyers. Here’s an overview of who pays what.
As the buyer, you can plan to cover fees associated with your new mortgage:
- Loan origination costs
- Appraisal fee
- Credit report charge
- Lender’s title insurance
- Government recording fees
In addition, you’ll pay title search charges, the final survey, a portion of property taxes, homeowners insurance, and some initial HOA dues.
The seller or builder pays real estate agent commissions and legal fees out of proceeds from the sale price. They also cover their own portion of title insurance fees and transfer taxes.
Some builders offer incentives like seller credits to offset the buyer’s closing costs. Credits effectively reduce the sales price, lowering your out-of-pocket amount due at closing.
Builder credits are especially common if you work with the company’s preferred lenders and title firms. Don’t be afraid to inquire about credits or concessions during purchase negotiations.
How to Save on Closing Costs
New construction closing costs can tally up quickly. But you’re not necessarily stuck paying full price. Use these tips to keep your total closing costs in check:
Negotiate with the Builder
Tap into your negotiation skills from the start. Sometimes builders bake credits or concessions into purchase offers to win over buyers. But if not, speak up to request they contribute to closing costs.
Builders benefit from timely closings to keep cash flowing. Letting them pay title fees or chip in toward lender costs encourages you to use their preferred providers. Don’t be shy to negotiate – the worst they can do is say no.
Use a Buyer’s Agent
Experienced buyer’s agents have deep connections with local builders. They know what incentives each builder offers and can advocate for you during negotiations.
The right agent ensures you get the best deal possible. And many like Felix Homes even rebate part of their commission back to you at closing. That’s cash in your pocket you can put toward other closing expenses.
Score Lender Credit from Preferred Programs
You have every right to shop lenders and find the best rate for your situation. But builder’s preferred mortgage partners offer perks that save money at closing.
Opting for the preferred lender can score you lender credits of $1,000 or more in many cases. These credits reduce your out-of-pocket costs. Before committing, still compare rates and fees to be sure the preferred lender makes financial sense overall.
Reap the Benefits of Preferred Title Companies
Sticking with the builder’s go-to title company also pays off. Preferred title partners help streamline communication and speed up the process.
Like lenders, preferred title agents may offer buyers credits or discounts as an incentive. Some will waive title search or escrow fees totally if you use them for closing services.
Look for Seller Credits
Even if you don’t use their hand-picked providers, many builders apply general seller credits at closing. These credits effectively reduce the purchase price and limit your cash outlay.
Credits can range from a few hundred to several thousand dollars. Builder reps may voluntarily disclose available credits, but don’t wait around to ask. You could score some major savings off the selling price.
Shop Around for the Best Rates
While preferred programs offer perks, still compare costs on third-party settlement services too. Shop mortgage rates from 3-4 different lenders. Search for title companies offering discounted fees for new buyers.
Locking in the lowest interest rate and settlement charges boosts savings beyond just credits alone. Don’t leave money on the table by blindly sticking with the builder’s partners.
Preparing for the cost of closing on new construction takes research and planning. But buyers willing to negotiate and maximize savings can reduce their out-of-pocket expenses.
Understanding which fees are fixed and which are open to credits or discounts gives you power at the bargaining table. Partnering with the right real estate agent and lender ensures you start off on the best foot.
With a little preparation and creativity, you can trim closing costs substantially. That frees up more room in your budget to accessorize your new home so it truly reflects your personalized style.