First-Time Home Buyer Building A House: What To Know

Buying a home is one of the largest investments you’ll ever make. But as buyers struggle with rising home prices and a dwindling housing supply, many wonder whether building is a better option.

If you’re a first-time home buyer building a home, you’ll have a different experience than someone buying an existing home on the open market. Here’s a look at the new construction process, including the pros and cons of building your first home and financing options.

Should You Build Or Buy Your First Home?

When buying your first home, one of the first questions first-time buyers ask is whether they should build a new home or buy an existing one.

Existing homes are homes that are owned and occupied before being listed on the market. Depending on where you live, an existing home with similar features to a new home will often cost you less, and they’re typically move-in ready. There are also more loans available for buying existing homes. However, you’ll likely have to compete with other buyers, especially in a competitive market, and you may have to make some compromises if you can’t find an available home that matches all your wants.

A new construction home is a home in which the buyer is the first to live in. In some cases, buyers can pick out every detail of the home, and in other cases, you can only choose between preselected features or designs.

New homes are becoming an attractive option for first-time buyers, especially as the current market continues to struggle with limited inventory and high buyer demand, and it gives buyers the ability to completely customize their homes with less competition. But, financing is more expensive compared to existing homes, and there could be unexpected costs and delays during the building process.

Questions To Consider Before Building Or Buying Your First Home

Before you decide to build or buy, it’s important to think about your budget, the housing features you want and the location where you intend to buy. Here are some questions to consider:

• How much home can you afford? What’s your budget for building or purchasing a house? Your budget should include the cost of purchasing or building, down payment, closing costs and any other related expenses. Make sure you can afford to purchase or build a home and cover ongoing costs that come with homeownership. Don’t forget to leave some wiggle room in your budget, especially if you build.
• Which home features do you want? Finding the home features you want in an existing home could take some time. If you do a custom build, you can include these in your building plans. Make a list of home features you want and determine whether it’s possible to find these in an existing home or whether it’s easier to include them in your new construction home.
• Where do you want to live? How important is location to you? Do you commute to work? Do you have a specific school district in mind? Do you want to live close to your family? You may not be able to build a house in a location that meets all your needs, but buying one in a certain neighborhood could take time as well.

Pros Of Building Your First Home

Here are some advantages to building your first home.

Customizable Options

Customizable options are one of the biggest benefits of building your first home. In a full custom home, buyers get to choose every detail, from the exact layout of the home to the location of every single electrical socket. There are also semi-custom homes, which allow you to customize some parts, and spec homes, which are built without a specific buyer in mind.

In competitive markets, it can be difficult to find a home that has what you want or need. By building, you can choose what you want without waiting for a home that ticks all the boxes to hit the market.

No Competition

When buying a new home, you aren’t competing with other buyers. This means you aren’t going up against other offers, dealing with counteroffers or entering bidding wars. Because there’s less competition, it also means there’s less room for negotiation.

Less Maintenance

Less home maintenance is another common benefit of building your first home. Because everything is new, there’s less of a chance of something breaking and having to make repairs after moving in. Plus, many builders offer builder warranties, which cover items that are typically a permanent part of the house, such as plumbing or electrical.

Cons Of Building Your First Home

There are also drawbacks to building your first home.

Nonnegotiable Price

A nonnegotiable price is a possible drawback of building your first home. What you see is what you get. Builders typically set prices in advance, and if a builder negotiates on the base price for one buyer, future buyers could also try to get a lower price. You’ll have better success negotiating other things like closing costs, lot lines, appliances and upgrades.

Longer Time Frame

A longer time frame is a possible drawback of building your first home, especially if it’s completely custom. According to a 2022 report from the U.S. Census Bureau, the average length of time to build a new single-family home was a little over 10 months, or over 12 months if you’re doing it yourself. However, it could take less time, or it could take significantly longer.

Supply Shortages

There’s always the possibility of supply shortages. For example, the National Association of Homebuilders (NAHB) said that in 2021, more than 90% of builders reported delays and material shortages. If something you want isn’t available, like a rare type of marble for your kitchen countertop, it could delay the building process.

How To Build A House As A First-Time Home Buyer

When you’re a first-time home buyer building a house, it’s important to know how the new construction home building process works. Here’s the step-by-step process.

1. Plan And Budget

Before you select a builder or a lot, you need to make sure you can afford the home with the features you want and need. The first step is to make a list of your monthly income and expenses to help you decide on the amount of your monthly earnings you can put toward building your home. You can break down expenses into categories to help you better evaluate which ones are a necessity and which you can do without.

You’ll also need to have a down payment for a loan. Most land loans and construction loans require a larger down payment compared to a conventional mortgage for an existing home, but requirements vary depending on the lender and the specifics of the loan.

Once you know your income and how much you plan to put down, you can determine how much you can afford to spend on housing each month. A common rule that many home buyers use when budgeting for a house is the 28% rule, which states that you should spend no more than 28% of your gross income on housing expenses.

Source: https://www.rocketmortgage.com/learn/how-to-budget-for-a-house

2. Prequalify For A Loan

Unless you plan to pay with all cash, you’ll need to prequalify for a loan before buying land. Prequalification is typically the first step in the process for a first-time home buyer building a house. Prequalification helps you get a better understanding of how much you can borrow along with what interest rate you may potentially qualify for.

During the prequalification process, you’ll submit your financial information to your lender to let them know your income and how much debt you have. However, this only gives you a general idea as your lender won’t verify any information. Once your lender verifies your information during the preapproval process, these numbers could change.

3. Work With Professionals

When building a house, you’ll work with more professionals than if you were buying an existing home, such as a:

• Real estate agent: Your agent will represent you throughout the entire process to ensure you get the best possible deal. An agent can help you when talking with the builder and contractors to make sure your needs are met and give you advice on upgrades and designs.
• Contractor: The general contractor drafts the construction timeline, gathers necessary permits and oversees the work on the construction site, making sure everything is done safely and correctly.
• Architect: An architect will work on the initial design and planning of the home, including the layout, design, materials and style. Architects will do their best to meet the buyer's expectations while also keeping their budget in mind.

These experts are masters in their professions, with the experience and knowledge to complete your home build on time and to your specifications. You can start building your team by shopping around for a reputable real estate agent who specializes in new construction homes. An agent is also a great resource if you need help finding a reputable builder and other professionals.

Average Cost Of Building A House

According to HomeAdvisor, the average cost of building a house in 2023 is $308,499, but most buyers pay between $118,206 and $499,842. Construction materials and labor costs account for most of the budget, and other smaller cost factors include interior and exterior finishes, site preparation and room add-ons.

But before you build your house, you’ll also need to purchase land, costing anywhere from $3,000 to $150,000. However, prices vary significantly depending on the lot size, location and whether there are already utility connections on the site. Clearing the land costs between $1,300 and $5,100.

One of the cheapest ways to build a house is to do as much of the work yourself as possible. You can also keep building a home budget-friendly but choosing simple floor plans, only building what you need, using high-quality, lower-cost materials and working with licensed professionals.

How To Finance A New Build As A First-Time Home Buyer

First-time home buyers have several options when it comes to financing the home they want to build. Here are some options:

• Construction loan: Construction loans are short-term options that allow buyers to finance the cost of building a new house. Construction loans can be used for the cost of the land, permits and fees, labor, certain building materials, appliances and landscaping. Once construction is done, the borrower must repay the loan or convert it into a mortgage.
• Construction-to-permanent loan: A construction-to-permanent loan turns into a fixed- or adjustable-rate mortgage once construction is complete. Borrowers make interest-only payments throughout construction, and once the project is complete, the loan converts into a mortgage.
• Federal Housing Administration (FHA) one-time close loan: The FHA one-time close loan is a government-backed construction loan that finances the lot purchase and construction of the new house and then transitions into a permanent mortgage with only one closing.

Qualifications For A First-Time Home Buyer Building Loan

You’ll need to qualify for construction loans if you plan to finance your new home. Here’s a list of the basic qualifications for a first-time home buyer building loan:

• At least a 620 credit score, but some lenders may require a credit score of 680 or higher.
• A 10% – 20% down payment (or 3.5% for the FHA one-time close loan).
• A debt-to-income (DTI) ratio of no more than 45%.
• Project and construction information with construction details, timeline and budget.
• Contractor or builder license and insurance documentation.

Tips On How To Save Money When Building A House

Building a house isn’t cheap, but there are ways you can cut back and save money. Here are some common ways to save money when building a house:

• Tackle DIY projects: If you have experience doing home improvement DIY projects, you can do some of the work yourself to save money. Consider doing some of the final touches yourself, like painting the walls and landscaping.
• Leave rooms unfinished: Leaving certain rooms unfinished, such as a garage or basement, can greatly reduce the cost of building a home. Once you’ve saved enough money, you can go back and finish these areas.
• Consider alternative homes: Consider alternative home builds, such as a tiny home or modular home. Not only can they help save money when building a home, but they’re more eco-friendly and take less time to build.
• Choose a stock design: Building a custom home is expensive, but many builders offer stock plans instead. Choosing a stock plan doesn’t give you as much control over your home’s layout, but you can still ask to make adjustments.

FAQs: First-Time Home Builders

Here are the most frequently asked questions on first-time home buyers building a house.

Is it cheaper to build or buy a house?

Whether it’s cheaper to build or buy depends on a number of factors. When building a home, the location, the type of home and how much you want to customize it, and its size can all affect the final price.

Is a loan to build a house the same as a mortgage?

There are several differences between a loan to build a house and a mortgage. Construction loans are short-term, and borrowers will need a more permanent loan once construction is completed. Traditional mortgages only finance the purchase of an existing property.

What is the most expensive part of building a house?

The most expensive part of building a house is purchasing the lot, followed by foundation and framing. According to HomeAdvisor, lot prices range from $3,000 to $150,000, and that doesn’t include the cost to clear the land.

The Bottom Line: Build Your First Dream Home With Patience And Funds

As a first-time home buyer building a house, you get the ability to fully customize your home without competing with other buyers. While it does take longer and can be expensive, there are ways to save on costs while still making the space entirely your own.

If you aren’t sure if you want to build your first home or buy an existing one, we’re here to help and answer any questions. Start the approval process with Rocket Mortgage^® today!