What First-Time Homebuyers Need to Know About Building a House

As home prices keep rising, a first-time homebuyer might wonder whether it’s cheaper to buy land and hire a contractor to build a home. But what’s involved with building your first home? How does the process work?

The project isn’t for the faint of heart. Building a house from the ground up is a different experience than buying and moving into an existing home. Before jumping into the new construction market, learn what you need to know about the pros and cons, financing options, and timelines—plus how much new construction costs.

Pros and Cons of Building Your First Home

Pros Explained

• Ability to customize according to your lifestyle and needs: Designing your house from the foundation to the roof allows you to create a space that works for you, rather than working from someone else’s preferences.
• Flexibility: Some rooms or extras can be left unfinished, allowing you to save money on building costs by waiting to finish them later or handling them yourself.  
• Energy-efficient and low-maintenance options: With the right design and proper inspections, you could create a low-maintenance, energy-efficient home that avoids the surprise issues that can pop up in older houses.

Cons Explained

• Long lead times: Buying land, lining up financing, permits, and construction all takes time.
• Supply chain issues: Manufacturing and shipping challenges may lead to delays, increased costs, or altered plans for home finishes and features.
• Buying land can be complicated: Potential pitfalls can affect your planned costs, utilities, and timeline.
• Possible labor shortages: The availability of labor can be challenging since various skilled laborers are needed throughout a home-building project. If there's a labor shortage due to high construction demand, significant delays can occur.

How Much Does Building a House Cost?

The median sales price for a new home was $436,700 in March 2022, increasing more than 21% compared to the same month in 2021, according to the National Association of Home Builders (NAHB). That’s only slightly more than the median price for all houses sold in the U.S. at $428,700 as of the first quarter of 2022.

However, the cost to build a house varies widely. “We get a lot of calls from people who don't have land yet, asking how much it costs to build,” said Gregg Cantor, president, and CEO of Murray Lampert Design Build Remodel in San Diego, California. “There’s no magical cost per square foot for a site unseen.”

For example, whether the land is relatively flat or sloping impacts grading and foundation design requirements, which then affects cost significantly, Cantor said.

According to an NAHB survey of new-home builders, major construction costs typically include:

• Framing
• Fees and inspections
• Excavation
• Exterior finishes
• Major systems (plumbing, electrical, heating, and cooling)
• Landscaping and outdoor structures

The largest share of new construction costs stems from interior finishes (such as insulation, drywall, painting, lighting, and appliances), according to the survey. But you may be able to save money on these finishes, said Brian Walsh, senior manager and certified financial planner at digital personal finance company SoFi, who built a home in the Midwest to be closer to family.

“HGTV [shows have] skewed our expectations of finishes and costs, causing people to think they need hardwood floors, granite countertops, and custom trim,” Walsh wrote in an email to The Balance. He also notes that it’s possible to achieve expensive looks with cheaper materials—for example, using laminate or luxury vinyl plank flooring instead of hardwood.

How to Finance a New Build as a First-Time Homebuyer

In most cases, you’ll apply for a construction loan to finance your home build. Conditions and requirements vary based on the lender and loan type. Because building a new home involves risks regarding uncertainty, delays, and other issues, not all lenders offer construction loans, and they often have higher or floating interest rates than conventional loans, said Bill Gassett, a RE/MAX agent in Massachusetts at Maximum Real Estate Exposure.

“Certain banks specialize in construction loans. It becomes a three-way relationship between a bank, builder, and homeowner,” Cantor says, noting that the builder may need to be approved by the bank or underwriter (such as with VA loans). This process ensures the builder or general contractor is licensed to undertake the work, protecting the lender’s investment.

You’ll provide the lender with architectural drawings for your project and a set of building specifications, said Gassett. Construction loan lenders usually issue payments on a set draw schedule based on major construction phases.

The Homebuilding Process

Gassett suggested that before building a home, it’s crucial to speak with vendors and investigate delays in your area to set your expectations around potential time frames. In 2021, homes built on the owner's land by general contractors took an average of 9.4 months to complete.

To help you plan ahead, here are the steps in the home-building process.

Prequalify for a Loan

Start arranging financing before you begin construction unless you have enough cash to fund the entire job, says Phil Warrick, a North Carolina-based builder and president of Piedmont Wholesale Engineered Products. In general, be prepared to finance four times the lot’s value to build a house, he said—a $100,000 lot could require a $400,000 loan for construction.

A complication for homebuilders right now is rising interest rates, says Walsh. “Rates have gone up dramatically and the typical time lag between signing a contract and moving into your new home can be a year or more,” he adds. “Be conservative when projecting your budget to account for future rate increases. If they stay the same or go down, amazing. But if they go higher before closing, you do not want to be house poor or not secure your mortgage, therefore losing your deposit.”

When you're shopping for a construction loan, ask at the application stage whether the lender offers a single close or a multiple close product. A single-close loan will usually lock in your interest rate up front and then convert to a standard mortgage after construction is done. A multiple close loan will finance your construction with the first close, and then you will close again at the completion with a new market interest rate.

Assemble an Experienced Team

A good real estate agent can help first-time buyers navigate the process of building a new home, from finding land to closing the sale. Ask around to find an agent who can refer you to experienced homebuilders.

“Real estate agents hear quickly when people sour on experiences with builders and will hear all the bad news,” Gassett says. “A lot of builders like to overpromise and underdeliver.”

At a minimum, make sure your contractor has insurance, a business license, and a contractor's license, says Warrick. “Many people will take advantage and walk away, leaving you with a [half-built] house.”

Design Your Home

Work with your builder or architect to plan your future home. If you buy plans from elsewhere, your builder may need to modify them to meet local building codes and restrictions. Warrick notes that codes can vary quite a bit—for example, plans drawn up in one state might feature 2-by-8 floor joists, while your local code requires 2-by-10 joists.

Prioritize design features that are difficult to change later, like ceiling heights, according to Warrick. “Take time to make sure the house's structure is what you want before splurging on cosmetic features,” he says. “You can finish rooms, upgrade floors, install cabinets, paint, and upgrade light fixtures in the future.”

“After the permitting process, we usually rebid everything, and pricing mostly goes upward,” says Cantor.

Get Permits and Start Construction

Depending on your location, expect construction documents and permit processing to take between four and eight months, according to Cantor. The build timeline depends on the home's size, scope, fit, and finishes. With landscaping, you can expect a new build to take at least eight months, he said, and features such as pools or spas may take longer. The timeline may be extended in 2022, where you may wait longer for windows, roofing products, sheetrock, and other building materials, Warrick says.

It may take longer if you need a variance, which is likely for custom construction. Depending on your community, you may need a permit for what you're building, where you're building on your lot, or even what may already be built on the lot. An architect or real estate attorney who knows the area and municipality will be vital for predicting or avoiding these delays.

Gassett agrees, saying, "You'll need to temper your expectations on how quickly you'll be able to complete the project." Stay flexible and consider your budget as you and your builder navigate price changes and supply chain issues, he advises.

As construction progresses, a representative from your lender will visit the site to ensure the completion of specific steps. The lender will then release a percentage of your loan, as detailed in your agreement so that you can pay your builder.

Wrap Up and Closing

After a final inspection, the new home receives a certificate of occupancy. However, before closing the deal, it’s a good idea to hire an independent home inspector to look over the new house. Walsh says he’s seen more buyers skipping inspections, but inspectors may point out issues that can save you thousands of dollars down the road. “This is a few hundred bucks that’s always worth it,” he says.

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