Do Builders Pay Closing Costs on New Construction?
Discover builder contributions to new construction closing costs. Understand influencing factors and how to evaluate these incentives.
When purchasing a new construction home, understanding the financial obligations beyond the purchase price is important. Closing costs are fees paid at the close of a real estate transaction. While buyers typically bear these costs, home builders often contribute to a portion of these expenses, offering incentives to facilitate sales. This can significantly reduce the buyer’s out-of-pocket expenses.
Components of Closing Costs in New Construction
Closing costs encompass fees associated with finalizing a home purchase. These amount to 2% to 6% of the home’s purchase price. For instance, on a $400,000 home, these costs could range from $8,000 to $24,000.
Lender-related fees include loan origination fees, which can be 0.5% to 1% of the loan amount. An appraisal fee, between $300 and $600, is also common for mortgage approval. Title-related expenses cover a title search, costing $200 to $400, and title insurance, which can range from 0.5% to 1% of the purchase price.
Additional charges include attorney fees, ranging from $500 to $1,500 in states requiring legal oversight, and recording fees charged by local governments to document the deed and mortgage. New construction properties may also incur builder administrative or processing fees, which can be $100 to $1,000. Impact fees, charges levied by local governments for public services like schools and roads, average around $9,000 nationally but vary significantly by location. Buyers also prepay property taxes and the first year’s homeowner’s insurance premium at closing.
Builder Participation in Closing Costs
Builders offer incentives to contribute to a buyer’s closing costs, often called “builder credits,” “concessions,” or “incentives.” These contributions reduce the cash a buyer needs at closing. Such incentives range from 2% to 5% of the home’s purchase price or loan amount.
These offerings come as direct credits applied to closing costs, including loan fees, appraisal costs, and title insurance premiums. Builders also offer to buy down the mortgage interest rate, temporarily or permanently, to lower monthly payments. A common condition for receiving these incentives is for the buyer to use the builder’s preferred lender or title company.
Factors Affecting Builder Contributions
Several factors influence whether a builder offers closing cost assistance and the extent of that support. Current real estate market conditions play a role; in a buyer’s market with higher inventory, builders are more likely to offer incentives. Conversely, in a seller’s market with limited inventory, incentives are less prevalent.
A builder’s inventory levels, particularly unsold homes or those nearing completion, drive promotional efforts. Builders offer enhanced incentives towards the end of a fiscal quarter or year to meet sales quotas. Community promotions are common, where builders provide incentives to generate initial interest in a new development or to accelerate sales in a particular phase. A builder’s relationship with preferred lenders and title companies enables them to offer bundled incentives.
Evaluating Builder Incentives
Prospective buyers should evaluate any closing cost contributions offered by a builder. It is important to consider the overall value of the transaction beyond immediate savings. Comparing the total cost of the home, including incentives, to similar properties in the market is a prudent step.
Understanding the conditions tied to an incentive is important. For example, using a builder’s preferred lender may come with a closing cost credit but could involve a higher interest rate or less favorable loan terms compared to an independent lender. Buyers should obtain loan estimates from multiple lenders, including the builder’s preferred option, to compare interest rates, fees, and overall costs. Ensuring the incentive genuinely reduces out-of-pocket expenses rather than inflating the home’s base price is crucial. All terms and conditions of the builder’s offer should be documented in writing before proceeding.