Closing Costs On A New Construction Home (Plus Tips To Save)

Home buying can be confusing and expensive, especially if you’re unaware of ways to save money at the closing table. Closing costs on new construction homes can quickly add up, so it’s important to know how and where to save money.

In this article, you’ll learn the ins and outs of closing costs and how to save big through negotiation and choosing the right lender. You’ll also learn how to save on closing costs by using Felix as your buyer's agent.

Key Takeaways

• Closing costs can be negotiated between the buyer and the builder, possibly decreasing the total amount due from the buyer.
• The ALTA settlement statement is an important document outlining every charge and fee on both the seller’s and buyer’s sides.
• Many builders will contribute to closing costs if a buyer uses their preferred lender or title company.
• There are ways to lower closing costs for a buyer, like using Felix, negotiating with the builder, and choosing the right mortgage lender.
• Using Felix as your buyer's agent could save you 1% off the sales price. Learn more about our Buyer Savings Program here.

What Are Closing Costs?

Closing costs are the fees associated with the final purchase of your home and typically range from 2% to 6% of your purchase price. Closing costs for a $500,000 home can range from $10,000 to $30,000. Even all-cash buyers are subjected to certain closing costs since many items are covered in this payment.

Typical items included in closing costs are:

• Title searches
• Attorney fees
• Appraisals
• Insurance fees
• Surveys
• Various taxes

New construction homes may have some additional fees, but it’s not uncommon for builders to cover a portion of the closing costs after negotiations.

Closing costs are not the same thing as your down payment. These costs are due at the closing table in addition to your down payment, and you typically need to present this payment as a cashier’s check or wire transfer.

Closing Cost Comparison: New Construction vs Existing Homes

Closing costs on new construction homes typically include a few additional fees not found with existing homes. This often covers certain builder fees that you won’t find with existing homes.

This doesn’t mean new construction homes always have higher closing costs. It’s common to negotiate with the builder and have them cover some or all of the closing costs. With this in mind, closing costs are actually about the same for new construction or existing homes. You might even save some money if you choose an experienced Realtor who can negotiate with the builder on your behalf.

What Are The Most Popular Loan Types For New Construction?

Conventional loan

Conventional loans are very popular mortgage options and great for new construction homes. With a minimum down payment of at least 3% of the purchase price, this loan option works for many budgets.

Homebuyers need a good credit score and clean credit history in addition to the down payment to get approved. First-time homebuyers who have saved up to make their first purchase are great candidates for this loan.

The advantages are the low down payment and competitive interest rates over the life of the loan. A key disadvantage, however, is private mortgage insurance (PMI) which protects the lender if you fail to make your monthly payments. Down payments of less than 20% typically require PMI, which adds to your monthly payment.

FHA loan

The government backs Federal Housing Administration (FHA) loans, which are a great option for those who don’t qualify for a conventional loan. Homebuyers with troubled credit, who experienced recent bankruptcy, or haven’t had time to save up for a large down payment are ideal candidates.

While the minimum down payment is 3.5% of the purchase price, FHA loans typically boast lower monthly payments, which is a great advantage for first-time homebuyers or those purchasing new home construction.

Instead of PMI, these loans require a Mortgage Insurance Premium (MIP), which is required for all FHA loans, regardless of the amount of your down payment.

The MIP protects the lender and typically lasts the life of the loan, which is one of the major disadvantages of this mortgage type. Another disadvantage is investment properties and second homes don’t qualify for this type of mortgage.

VA loan

A Veterans Affairs (VA) loan is a fantastic option for qualifying service members, their spouses, and veterans. First-time homebuyers and active service members relocating for work are great candidates for this mortgage loan.

There’s no requirement for a down payment and no PMI, making this a great option for new construction homes. Other advantages include flexible requirements and refinance options you won’t find with different loan types.

Some key disadvantages that prevent homebuyers from choosing a VA loan are the large funding fees associated with the loan and the inability to use it on a second home or investment property.

USDA loan

U.S. Department of Agriculture (USDA) loans help homebuyers who meet the location requirements set by the government. Rural homes within specified boundaries qualify for this mortgage type making this a good option for some new construction homes.

There’s no down payment required, no PMI, flexible credit score, and debt requirements, and they typically have lower closing fees than other types of loans. These advantages help first-time and experienced homebuyers who don’t have a ton of cash on hand.

Some disadvantages include the strict location requirements, inability to use this for second-homes or investment properties, and strict income requirements.

Construction loan

As the name suggests, construction loans only work with new construction homes and provide homebuyers with short-term mortgage options.

While you can find some lenders that offer a range of 5% to 20% for the down payment, most require a full 20%, meaning you’ll need to save up before committing to a construction loan. These loans also require PMI if you put down less than 20%, which can quickly increase your monthly payments.

An advantage is only paying the loan's interest while the home is under construction and having flexible terms once approved. Some disadvantages include high-interest rates and strict terms for approval.

Land loan

Land loans will help you buy the land of your dreams, but there are a few things to remember. They only cover the cost of the land, so you’ll have to get an additional mortgage to pay for the construction of your new house. Homebuyers eager to put a new home on a piece of property in their ideal location will use this loan.

They also have high-interest rates and require large down payments because they’re riskier for lenders. The minimum down payment is 15% for improved land, 25% for unimproved land, and 35% for raw land, although the rates could be even higher depending on the lender.

While the disadvantages are strict requirements and high-interest rates, the advantages are no PMI and the ability to buy land without having to pay for it using all cash.

What Is An ALTA Settlement Statement?

An American Land Title Association (ALTA) statement provides detailed information on a home purchase for the buyer and seller. It breaks down specific credits, debits, and certain charges that could alter the home’s final purchase price. ALTA statements keep everyone on the same page and ensure that each side of the deal has important information and the correct numbers.

The closing attorney prepares the settlement statement and gives identical copies to both the buyer and seller to ensure everyone has the correct information. The statement is broken up into seller’s and buyer’s columns, making it easy to read and follow.

In the middle of the statement, you’ll find the specific charges like title charges, adjustments, commissions, transfer charges, impounds, and miscellaneous fees. If you’re working with a real estate agent, they’ll have the chance to look over it and catch any potentially costly mistakes before the closing.

Does The Buyer Or Seller (Builder) Pay Closing Costs With New Construction?

In a new construction closing transaction, it’s typical to see both the selling and the buying sides pay some of the closing costs. While the buyers typically pay fees associated with the loan, title, and government charges, the sellers pay the commissions out of the purchase price.

An interesting advantage of buying a new construction home is the ability to negotiate closing costs with the home builder. Some may offer incentives like paying for half of the closing costs, while some may offer to pay more based on the negotiation skills of your real estate agent.

Even though it’s possible to negotiate them down, first-time homebuyers should expect to pay anywhere from 2% to 6% for closing costs on new construction homes in addition to the down payment.

A Breakdown Of Closing Costs When Buying A New Construction Home

Deposits, credits, and debits

• Sales price of the property: The buyer will pay for the property’s sales price. New construction is typically not a negotiated price, and your down payment and closing costs will stem from the total purchase price.
• Loan amount: The loan amount is typically the home's full price less your down payment. The buyer typically pays loan origination and lender fees at the closing table.
• Builder deposit / Earnest money: Earnest money protects the builder if a buyer backs out, and the buyer pays it to the builder upon a signed contract. Earnest money is typically 1% to 5% of the purchase price.
• Lender credits: Lender credits allow the homebuyer to pay a higher interest rate in exchange for receiving money from the lender to help with closing costs on new construction. Homebuyers without much cash on hand could benefit from this.

Prorations and Adjustments

• City taxes: The seller pays a year’s worth of city taxes at the beginning of the year. At the closing, the buyer will pay back the percentage of taxes for the remainder of the year. The seller will receive the payment as a credit.
• County taxes: Similarly to city taxes, the seller originally pays all taxes at the beginning of the year. At the closing table, the buyer will credit the seller and pay for the remainder of taxes from the day they buy the house.
• Seller-paid closing costs: You can often negotiate the terms of the contract to have the seller (or builder) contribute towards your closing costs. Even if this doesn’t work, the seller will pay for all real estate commissions, making this one less thing for new homeowners to worry about.
• Seller credits: At the closing table, sellers may credit the buyers for repairs from the inspection report, pre-negotiated terms like leaving the appliances, or if the buyer and seller agreed that the seller would contribute to closing costs.

Loan Charges

• Processing fees: The buyer will pay a loan processing fee which is charged by the lender for processing the application and the loan. It’s typically not a large amount and is due at closing.
• Appraisal fees: Even new construction homes are subject to appraisals. Hiring a professional appraiser to conduct a thorough report on the house and ensure it’s listed for the correct market price will satisfy the mortgage company and ensure it’s correctly listed. Buyers will pay the appraisal fee.
• Credit report: The mortgage lender runs a credit report usually before your official pre-approval to ensure you meet the qualifications of their loan. The fee could tie into loan origination fees or other generic loan processing fees that the buyer will pay.
• Flood certificate: A flood certification or determination establishes if a home is in a flood zone. Most mortgage lenders require this certification to determine the risk associated with the house. Most lenders require that you get flood insurance if the certificate determines a flood zone. The fee for the certification is also typically tied into other loan fees that the buyer will pay.
• Inspection certificate: Mortgage lenders often require an inspection, even for new builds. The inspection report will turn up any damage or needed repairs that could make the home dangerous until addressed. The buyer will pay for the inspection.
• Tax service fees: The tax service fee protects a lender from any issues with property taxes. Most closing costs on new construction homes include this fee, and it’s the buyer’s responsibility to pay.
• Pre-paid interest: If you close early in the month, you may run into pre-paid interest charges. These charges will cover the remainder of the loan for the month upon closing, and it’s usually an upfront fee at the closing table. The buyer will pay this fee.

Impounds

• Homeowners insurance: Most lenders require homeowners insurance from a third-party company. The insurance protects you from home damage and provides limited liability for accidents that may occur in the home. Buyers will pay for homeowner insurance and typically must provide proof to their lender.
• Property taxes: Property taxes are paid at the beginning of the year by the seller. The buyer will credit the seller for the remainder of the year once the home closes. For example, if the home closes in the first quarter of the year, the buyer will credit the seller for the remaining three quarters since the seller originally paid for a whole year.

Title charges and escrow fees

• Closing fee to the title & escrow company: Included in the closing costs for new construction homes are title & escrow company fees. The title service fee is necessary to ensure the title is clean and legally transferred to the buyer. Title and escrow companies ensure the home can transfer from the current owner to the homebuyer.
• Document handling fee: The document handling fee is usually a small charge from the mortgage company after they hand the documentation over to the bank to ensure proper funding. The buyer pays this fee.
• Lender’s title insurance premium: While it may vary in specific states, the buyer typically pays the lender’s title insurance premium at the closing table.
• Owner’s title insurance premium: Typically, the buyer will cover the cost of the owner’s title insurance premium.
• Title search fee: Depending on the state you’re in and your negotiated terms, the title search fee could be paid by the seller or buyer. The title search fee ensures there are no liens or outstanding issues with the title. If the seller is trying to incentivize the buyer, they could offer to pay for the title search fee. However, it’s not uncommon for buyers to pay this at the closing table.

Commissions

• Listing agent commission: The listing agent determines the commission rate. Although it varies per state and agent, the typical total commission is around 6% of the home price, with 3% going to the listing agent and 3% to the buyer’s agent. The seller pays the commissions, which come out of the purchase price. Since most new home builders have in-house sales agents, the commission may be more or less for the seller’s side.
• Buyer’s agent commission: The seller pays the buyer’s agent commission out of the home’s final purchase price. Typically, the buyer’s agent commission is equal to 3% of the final sale price. At Felix, we reduce the commission we charge the seller so that you can save on the final price. In fact, our clients save $12,375 in commission fees on average.

Government recording and transfer charges

• Recording fee to register of deeds: Upon a completed transaction, the government requires a public record of the sale, which is where the recording fee covers. The buyer typically pays this at the closing.
• Transfer tax: In most states, the seller pays a transfer tax at the closing. The transfer tax verifies the change in homeownership and provides the buyer with a clean title and ownership record.
• Record NOC: Most states require a recorded notice of commencement (NOC). The seller, in this case, the builder, will typically pay to record the NOC.

Miscellaneous charges

• Homeowners insurance premium: The homeowner's insurance premium is typically due at the same time as other closing costs and serves as a charge to keep your insurance valid and active. The homebuyer pays this fee.
• Pre-paid HOA dues: Homes that are constructed as part of a homeowners association (HOA) can have monthly or quarterly dues to pay for the amenities or services the HOA offers. Some HOAs will require you to pre-pay a certain amount of HOA dues before closing on the home.
• HOA transfer fee: Since neighborhood HOAs must keep detailed property records, the transfer fee includes the cost of updating all records. The sellers typically pay this transfer fee.
• HOA working capital: Many builders establish an HOA in their new communities during construction. They may charge HOA working capital fees, meaning new buyers pay this one-time fee to fund projects and improvements around the neighborhood.

How To Calculate Closing Costs

On average, a home listed for $500,000 will cost the buyer anywhere from $10,000 to $30,000 in closing costs. The total price will vary depending on how much, if anything, the builder is willing to credit towards closing costs and the type of loan you get. Here are a few items you’ll need to add to the closing costs calculations.

• Processing fee: around $1,000
• Taxes: around $250
• Inspection, flood certification, and appraisal: around $700
• Pre-paid interest: around $700
• Impounds: around $700
• Title and Escrow charges: around $2,000
• Government charges and transfer charges: around $3,000
• Homeowner’s insurance premium: around $900
• HOA dues/fees: around $3,000

Can Closing Costs Be Included In The Loan Amount?

Some mortgage lenders allow you to roll your closing costs into the price of the loan. It’s important to remember that not all lenders will do this, and it’s most common for homebuyers to pay closing costs in cash at the closing.

If this is an option you’re interested in, make sure you talk to your lender before starting the loan application process. It could save you money upfront, but the costs will add to your monthly payments.

When Are The Closing Costs Due?

Closing costs for a new construction home are due on the closing day. They are typically paid via a wire or cashiers check and cover the various fees discussed above. Before starting the home buying process, buyers should ensure they have money saved up for the down payment, closing costs, and other fees.

Remember that the closing costs are in addition to your down payment, so you’ll need to bring appropriate funding for both. Your real estate agent can give you a close estimation of your total closing costs, helping you prepare before closing day.

Can You Negotiate Lower Closing Costs When Buying New Construction?

Many first-time homebuyers are unaware you can negotiate closing costs on new construction homes. If you decide to use an experienced real estate agent, you may be surprised at how much you could save.

Some builders are willing to apply credits from other areas of the home towards closing costs, and some may even offer to pay large amounts of the fees to incentivize buyers. It never hurts to ask, so have a conversation with your builder before making an offer.

What Is A Preferred Lender?

It’s common for builders to partner with mortgage lenders and use them as their preferred lenders. When a homebuyer plans to buy a new construction home, the builder often suggests they use their preferred lender, which might even be an in-house service. Always shop around before settling on a mortgage lender to ensure you get the best deal.

Some advantages to using the builder’s preferred lender are incentives (i.e. credits towards your closing costs), easy communication between the lender, seller, and buyer, and flexible approval. The disadvantages are strict terms and typically slightly higher interest rates, which could increase your monthly payments.

What Is A Preferred Title Company?

A preferred title company is much like a preferred lender. These title companies work directly with the builder and make communications much easier on both the selling and buying sides. Many builders will also suggest buyers use their preferred title company when purchasing one of their homes.

Some an advantage to using the builder’s preferred title company is that the deal tends to close on time and their is clear communication between all parties. Using a preferred title company can often speed up certain processes and eliminate confusion from outside or third-party companies.

The disadvantages are not being able to choose the title company and possibly using one that will charge more for their services.

How To Save On Closing Costs When Buying A New Construction Home

• One of the easiest ways to save money on closing costs when buying a new construction home is using Felix. With our Buyer Savings Program, we'll reduce our commission so that you can save on the sales price. Our clients have saved over $1,000,000 in commission fees to date!
• Make sure you use Felix to help you find the best builders in your area. You’ll receive a trusted and up-to-date list of available properties and home builders in your area, allowing you to make the best decision and save money when choosing a new construction builder.
• An easy way to save money on your closing costs is by asking the builder to pay the title insurance premium. If you use their preferred title company, they may have an increased willingness to cover this cost.
• If you’ve negotiated with the builder on certain features, finishes, or credits, ask if they can put the credits towards closing costs. Some builders will provide seller credit at the closing table, which could save quite a bit of money.
• Before settling on a mortgage company, ask about preferred lender incentives. Many builders will give you a seller credit at the closing if you use their preferred lender, which could save you thousands of dollars.
• Much like the preferred lender, many builders offer preferred title company incentives. Before choosing a title company, ask your builder if they will make a contribution towards your closing costs if you use their preferred title company.

The first step to seeing if a new construction home is right for you is to contact a local Realtor. If you're considering buying a home in Middle Tennessee, feel free to give us a call at 615-354-5731.