It doesn’t take long to notice the endless talk about higher mortgage interest rates in the news. These headlines can be daunting for first-time home buyers, especially if you want a new home and don’t have home equity to back up your purchase.
However, we’re here to tell you that purchasing a new construction home without relying on equity is possible. With the right real estate agent, having enough cash to close, and financial stats to satisfy mortgage lenders, a home purchase can be in your future.
How do you buy a new construction home without already owning a home?
While homeowners have the upper hand in buying a new construction home, you don’t need equity if you have the right financial profile. Typically, lenders and builders would commit to a contract with a buyer with these things in place:
- A strong credit score. The higher, the better.
- A low debt-to-income ratio.
- 5-6 months of savings.
- Ability to pay a 20% down payment (or handle extra PMI payments with a minimum of 5% down).
While all this seems straightforward, having these conditions in place can take months to years. If you have new construction as a goal, it’s never too late to start saving and working on your credit profile.
Step 1: Talk to Financial Experts
To know how hard you have to work, you must first talk to a lender and see where you stand. This doesn’t have to be your final lender either. It can be your bank. Test the waters and ask them for a pre-approval letter. This process will require some time and paperwork, but you can get an accurate assessment of your tentative top dollar — or you may be told about some weak spots to work on before you can be presented with a letter.
If it’s within your means, consulting the expertise of a financial advisor can get you some incredible tips about saving and rehabbing any weak spots in your credit score or DTI. By knowing what to attack, you can get victory in the biggest areas of need sooner rather than later.
Typical Financial Benchmarks
- Down payment amount: The typical down payment for a new construction home without equity is 20%. This figure is essential to give the builder and the builder’s preferred lender enough confidence to proceed. How much is that? If you buy a $400,000 house, multiply that by 0.2 to get $80,000.
- Credit Score: The higher, the better, but a minimum of 680 is typical. Being in the high 700s and into the 800s is optimal. When looking at your credit score, lenders will be looking to see if you have any past financial hardships and if you can maintain good standing with the debt that you have taken on.
- Debt-to-income ratio: No higher than 45%. This means that after dividing your monthly debts by your net monthly income, the figure should be no higher than .45. For example, if you have a net monthly income of $5,000, but you have $2,500 of bills per month, your DTI is .5, or 50%, which is too high. (Naturally, your lender will also consider how you won’t have significant debts like your current rent if you plan to have the new construction home as your future primary residence)
- Savings: Having a solid financial footing is equally as important. It is recommended that buyers set aside an additional 4-6 months of housing costs.
Step 2: Get a Real Estate Agent
Real estate agents who regularly work with new home builders can offer plenty of advice about buying a new construction home. When you have this pro on your side, you can gain these advantages that put a new house within your reach:
- Expert advice on when and where to buy
- Insights on the right builder for you
- An intermediary between you and the lender, granting you extra home loan qualification advice.
Working with an agent is crucial to buying a new construction home without equity because they will have the most tailored advice for your situation. When representing you, they will be the intermediary between you, the builder, and your lender.
Step 3: Get the Deals
You can access the best information about deals, incentives, and much more when you have done your financial homework and have solid real estate representation. Most builder discounts come through special incentives and mortgage rates from the builder’s preferred lender.
The builder’s preferred lender can cut exclusive deals to lower your expected mortgage payments through limited-time lower interest rates. Builders may also offer discounts and upgrades that are exclusive to their brand. Shop around to compare rates and incentives, and listen to your realtor to get the best new build deals.
Buying New Construction Home Without Equity Is Possible
Buying a house without equity can be intimidating, but it isn’t impossible. Work closely with your realtor, builder sales rep, and lender to decide what home and mortgage loan type works for you and your financial situation. When you proceed cautiously and prepare well, a move-in day into a mint-condition home can be in your future!
Alicia Persson is the official in-house content writer for Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined MH, she was a freelance writer for 7 years, providing real estate and home living content for boutique digital marketing agencies.
She is a proud University of Virginia Masters graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she is playing keyboard in a local 90’s band in central Virginia or spending time with her amazing family.