The Ultimate Guide to Obtaining Financing for Pre-Construction Property
In today’s real estate market, bidding wars and record-high prices have become the norm. In addition to offering well over list price, many buyers are also waiving all contingencies on their offers, including some financing contingencies. While doing so can seem like a bold approach, with the right partners in place and proper due diligence this can be an attractive option for some buyers.
If you’ve found yourself waiving all contingencies, offering over list price, and still not having any luck finding a new place to call home, there’s another option you should consider: pre-construction properties. These brand new buildings offer all of today’s top amenities, finishes, and features. If you have the ability to be flexible with your move-in date and have a strong financing plan in place, this can be an excellent way to start building equity and take advantage of today’s hot market.
Are Mortgage Contingencies Offered On Pre-Construction Properties?
Traditional mortgage contingencies are typically only valid for periods of 30-60 days. When buying pre-construction, the building is under construction, and likely many months away from completion. If you invest in a new development project early on in the pre-sales phase, you likely will not be able to close on your new home within 60 days. Buyers are encouraged to go through the mortgage application process with a preferred lender during the reservation period. Pre-construction buyers generally need to be pre-approved for their mortgage with a preferred lender before a sales appointment. This is simply so a buyer is comfortable and confident with their ability to secure financing. However, a formal commitment letter can not be granted, due to the property being under construction. In short, traditional mortgage contingencies are not offered on new construction properties.
Why New Construction Properties Take Longer to Close
Every real estate project comes with a target completion date. However, there are certain factors that are unforeseen. Supply and labor shortages, for example, can impact even the best construction schedule. Most experienced and reputable builders have ample time contingencies built into the construction schedule to account for this, but there are certain things – like global supply chain challenges – that are completely out of anybody’s control. Any delays in the construction process cause delays in obtaining the certificate of occupancy, which is required to close, and therefore can cause a delay in your closing date. If you’re purchasing a pre-construction property, staying flexible with your potential closing and move-in date is essential.
How Financing Timelines Differ with New Construction
Because of the time needed to finish and legally close on your pre-construction property, getting a formal commitment letter from a lender likely won’t be possible. When buying a new construction property, buyers are expected to be pre-approved before a sales appointment by a preferred lender. Once a reservation is signed, buyers are expected to sign a P&S within five business days.
At the end of the five-day period, if a buyer has not signed their P&S, the reserved property will be made available to the public again.
Some buyers new to the process might try to get a formal commitment from their bank or lender in place in advance and, when they are unable to do so, ask for an extension from the developer in hopes of signing their contract at a later date. However, extensions are generally unavailable from developers due to high demand and the time-sensitive nature of new construction sales. This means that buyers must be working with a lender and be pre-approved to purchase the property, and execute their mortgage agreement when a newly-constructed home is completed and has been granted a certificate of occupancy.
Financing Options For Pre-Construction Properties
The absence of a traditional mortgage contingency shouldn’t be a deterrent to investing in a pre-construction property. With the right team in place, you can make your dream of purchasing a new construction property a reality.
In addition to having open and honest conversations with your realtor, it’s just as important to identify a preferred lender who has an accurate and up-to-date picture of your finances. Your preferred lender will be able to advise you on options that are available today and any impacts your investment will have as the market shifts. Your real estate agent and your preferred lender are your biggest allies as you navigate the reservation process with a pre-construction property. Lean on them and know they’ll be with you all the way through your closing.
How to Reduce the Risks of Not Having a Traditional Mortgage Contingency
The best way to overcome the risks associated with a lack of a traditional mortgage contingency is to start building your team. A real estate agent will make you aware of the potential risks. Plus, they will ensure that you get 100% benefit from your investment. Your lender will educate you on the rates available to you today and the different programs you may qualify for so you can confidently finance your new investment.
If you’re interested in learning more about pre-construction or new development properties, contact us today!