Step 5: Signing Your New Home Contract

Up to this point, you’ve been dreaming about your new home and everything you’ll include in it, but now the dream becomes reality. The new home contract, a legally binding document between you and the builder, is one of the most important documents in the home building process, so make sure you understand it completely.

When reviewing your contract, your real estate agent will be a valuable resource and should be included from the very first meeting with the builder. If you don’t have an agent with you from the beginning, the builder could refuse to cover your agent’s fee or require you to work with their agent. The builder’s agent is there to protect the builder’s interests, so it’s important that you have someone in your corner, as well. In addition to your real estate agent, you might want to have a real estate attorney review the contract.

What’s a New Home Sales Contract?

The new home sales contract is a legal, binding document that spells out the terms of your home’s construction, such as the projected closing date, payment deadlines and customization decisions, responsibility for expenses, and each party’s obligations. The document is designed to protect you as well as the builder. You’re agreeing to pay the builder for their work, and the builder is agreeing to provide you with a finished house.

Once the sales contract is agreed to and signed, it will serve as a guide throughout the home building process. If you’re ever in doubt on the next steps, you can refer to this agreement. Your real estate agent or attorney can help you negotiate the terms of this agreement and will let you know if anything is missing. Typically, it will cover things like specifications, amenities, and floor plans.

If you don’t understand any part of the contract, ask for clarification. If you break the contract or miss key checkpoints, you could lose a lot of money. Make sure anything the builder agreed to verbally is written into the contract.

Main Components of a New Home Sales Contract

While you should read and understand the entire contract, there are certain aspects of the document you’ll want to pay close attention to. As you review your contract with your real estate agent or attorney, take note of the following:

  • Pricing: Your document should list how much you’ve agreed to pay for the house. Make sure you understand what’s included and what may incur additional fees or expenses. Read this section carefully to make sure there aren’t any hidden costs.
  • Timeframes: Dates and deadlines are critical. Scheduled dates will help avoid delays or incomplete work. Either you or the builder can negotiate penalties for not meeting deadlines. For example, if your builder doesn’t complete your house within the agreed-upon time, or if you miss key checkpoints for making deposits or getting approved for financing, this section will specify the penalty for missing these deadlines.
  • Payment schedule: You’ll need to pay your builder an earnest money deposit along with subsequent payments as construction progresses. Some builders ask for lump sum payments while others work with installments based on key completion dates. You could, for example, pay an initial five percent down payment followed by 10 percent after your home’s foundation is laid, 20 percent after walls and beams are added, and 30 percent after windows, doors, and plastering are complete.
  • Materials and construction: You’ll want to know exactly what’s being used to construct your new home. If you aren’t satisfied with the quality, let the builder know immediately. It’s much more difficult to change orders once materials have been ordered, shipped, and used.
  • Finished product: Your builder should stick to these parameters and build your home based on what’s listed in your contract’s drawings and specifications.

What’s an Earnest Money Deposit?

When you sign your contract, you’ll pay an earnest money deposit. An earnest money deposit, also called a good faith deposit, is money you put down to show you’re serious about the property you’re about to purchase. The housing market typically determines how much you’ll need to pay for your earnest money deposit. For example, in a hot housing market, you may need to put down anywhere from five to 10 percent of the home’s purchase price. However, if the housing market is a little more tepid, you may only need to put down two percent.

The earnest money deposit for a newly build house is usually larger than it would be for a resale home. This is because your builder is taking a risk to construct a new house. If you back out of the purchase, the builder is stuck with a home built to your specifications. It might be challenging for them to find a buyer for the house since it was tailored to your needs and style. To mitigate this risk, your builder might ask for more earnest money deposits as construction progresses. In most cases, earnest money isn’t refundable. If you don’t add contingencies to your contract and you back out of the sale, or if you fail to meet the home buyer requirements outlined in the contract, you could forfeit your entire deposit. However, if the builder cancels the deal, your earnest money should be returned.

Since earnest money is typically paid by check or wire transfer, you’ll want to get copies of the receipts for these deposits and make sure they’re being held in an escrow account, where the money should remain until closing. At the closing, the earnest money will be transferred over and applied to your down payment.  

Repairs and Warranties for Your New Home

Your contract might include a section about warranties for the construction and maybe the appliances. It might also specify a maintenance period, which is usually about six months. This is when your builder will follow up and correct any defects or issues.

Depending on the state in which you live, your contract may list express warranties which detail the types of defects your contractor will need to take care of, how long the warranties last, and what your maintenance obligations are as the homeowner. Manufacturer warranties can also be provided for major appliances. Read your contract carefully to understand what your warranties cover. If you’re unhappy with the conditions or if your contract doesn’t list warranties, negotiate this with your builder.

What Are Change Orders?

In construction, a change order is an amendment to the new home contract. For this change order to be valid, both you and the builder must agree to the terms. The change order will be factored in when any alteration to the original scope of work is made. For example, you might want to make a change to your build. Or, the change could be unavoidable, such as the building permit by-laws getting updated. The builder could encounter difficulties getting materials or they may discover an unknown property condition that impacts construction. If you request a change to your property’s plans, the builder might be able to charge a fee and alter the completion date. If your builder makes a change, they must inform you of the change, any additional costs, and any adjustments to the completion date caused by the change.

Financing, Appraisals, and Home Inspections

When you buy an existing house, there are typically contingencies relating to securing financing, having a successful appraisal, and getting a satisfactory home inspection. If a buyer can’t secure financing, or if the appraisal or home inspection don’t come back as expected, the home buyer can walk away.

When you’re building a house, however, these clauses are different. For example, if you can’t secure a loan, you may not be able to walk away financially unscathed. You may also bear the burden if the appraisal is low, or if issues are discovered during the home inspection. Here’s what to know about financing, appraisals, and home inspections when building a house:

Financing

Make sure you know what will happen to your earnest money deposit and your contract if you don’t qualify for financing. If you can’t get the loan, you may face penalties or forfeit your deposits and any payments you made. The contract should state by which date you’re expected to secure financing. Even if you’re pre-approved for your loan this isn’t a guarantee, so review this section carefully and discuss your options with your real estate agent.

Appraisals

It’s possible your new home may not appraise for its sale price. If your builder refuses to drop the sale price to match the lender’s appraisal, you could be forced to pay the difference, find a different lender, or get another appraisal. In most cases, builder contracts aren’t contingent on an appraisal, which means you can’t terminate the deal if the appraisal is too low without losing your deposit.

Home inspections

The home inspection is your chance to check on the craftsmanship and safety of the home. Make sure your contract includes a contingency stating the builder will correct any problems identified during the inspection. Some builders have their own inspectors. If you want a third-party inspector, make sure you include this in the contract. A good builder should welcome third-party inspectors throughout the process because they know they’ve done quality work. If the builder doesn’t allow third-party inspectors, this is cause for concern. Unlike resale homes where you can walk away if a house fails the home inspection, this isn’t necessarily the case with a new build. Ask your real estate agent or attorney to review this section and make sure you are protected.

Protecting Your Interests in a New Home Contract

There’s no getting around it — building a home is expensive. It’s likely one of the most expensive undertakings you’ll make. You want to come out of this on budget (or as close to your initial budget as possible) and with your dream home. Here’s how to make sure your new home contract protects your interests:

  • Hire a title company to safeguard your deposit. Keep your funds in a third-party escrow account where payments are released when the agreement is finalized. If your builder receives payment before your new home is completed as agreed, you lose your leverage in getting repairs and corrections done.
  • Understand the dispute resolution process. You may get along great with your builder, but you should know what to do if things go sideways. If your contract includes a binding arbitration clause in case of a dispute, litigation is off the table, and you’ll have no legal case if you need to sue your builder or contractor. If your contract allows for arbitration, you’ll need to submit your complaint to an arbitrator who is typically an expert in the construction industry. The arbitrator examines both sides of the dispute during a hearing and provides a final decision to resolve the issue. Neither you nor the builder can file an appeal. Arbitration is less expensive than a formal court trial, and you’ll probably get to choose the arbitrator. You can also include a clause that details which party pays attorneys’ fees in case you end up in a courtroom.
  • Have professionals in your corner. Building a home is a complicated process with a mountain of paperwork. Your real estate agent and real estate lawyer can help you understand all the legal jargon, and they can help you negotiate the terms and conditions to make sure your interests are covered. Don’t sign anything until you’re completely comfortable with the contract and you understand everything you’re agreeing to.

Once you’ve determined location, chosen your floor plan and finishes, and signed your new home contract, construction will begin on your home! Soon, you’ll be sitting in your brand-new kitchen, sipping coffee, and breathing a sigh of relief that the building process is over. Well, probably not that soon. In step six, we’ll review the typical timeline from start to finish so you’ll know just how long it might be before you can finally start enjoying your new house.