Building vs Buying Your First Home: A Data-Driven Guide for 2024

For first-time homebuyers, building a new construction home can offer customization and less competition, but it often comes with a higher price tag and longer timeline than purchasing an existing home. Based on our experience assessment, your decision should hinge on three key factors: budget, desired timeline, and need for personalization. While the median price for an existing home is typically lower, the ability to design your dream home from the ground up is a significant advantage for many.

What Are the Main Differences Between a New Build and an Existing Home?

An existing home is a previously owned property. These homes are often move-in ready and can be more affordable in many markets. However, you may face competition from other buyers and could need to compromise on certain features.

A new construction home is a property where you will be the first owner. The level of customization varies; you might select every detail in a custom build or choose from preselected options in a spec home. The primary trade-offs are a higher potential cost and a building process that can take nearly a year or longer.

What Are the Advantages of Building Your First Home?

Building a home presents several unique benefits for a first-time buyer.

• Total Customization: You have significant control over the layout, finishes, and features. This eliminates the compromise often needed when searching for an existing home.
• Minimal Buyer Competition: You are not entering bidding wars or dealing with multiple offers, which is common in competitive housing markets.
• Reduced Maintenance: With brand-new systems and appliances, the likelihood of immediate repairs is low. Most builders also provide a builder's warranty, which covers major components like plumbing and electrical systems for a specific period.

What Are the Drawbacks of Building a New Home?

It's crucial to consider the potential challenges before committing to a build.

• Less Negotiation Power: Builders typically set firm base prices. Negotiation is often limited to closing costs or upgrades rather than the home's sale price.
• Longer and Less Predictable Timeline: According to the U.S. Census Bureau (2022), building a single-family home takes an average of over 10 months. Delays due to supply chain issues or weather are common.
• Higher Initial Costs: Financing a new build can be more complex and expensive. Construction loans often require larger down payments, typically between 10% and 20%.

How Does the Cost of Building Compare to Buying?

The financial decision is a major factor. While prices fluctuate by location, data from industry sources like HomeAdvisor provides a national benchmark. The average cost to build a house ranges from $138,937 to $531,294, with a national average of around $323,000. This does not include the cost of the land, which can add $3,000 to $150,000 or more.

In contrast, the median sale price for an existing home can be lower in many regions, but direct comparisons are difficult without analyzing specific local markets. The most expensive parts of building are typically the lot purchase, followed by foundation work and framing.

What Are the Financing Options for a New Construction Home?

Financing a new build is different from a standard mortgage. Common loan types include:

• Construction Loan: A short-term loan that covers the building phase. It must be paid off or converted into a permanent mortgage upon completion.
• Construction-to-Permanent Loan: This loan automatically converts to a standard mortgage after construction, requiring only one set of closing costs.
• FHA One-Time Close Loan: A government-backed loan for qualified buyers that allows for a lower down payment, as low as 3.5%, and combines construction and mortgage financing.

Qualification for these loans generally requires a credit score of at least 620 (though 680 is preferred), a down payment of 10-20%, and a debt-to-income (DTI) ratio below 45%.

What is the Step-by-Step Process for Building a Home?

1. Plan Your Budget: Determine what you can afford, including the land, construction costs, down payment, and a contingency fund for unexpected expenses.
2. Get Pre-Qualified: Speak with a lender to understand your borrowing capacity. Pre-qualification provides an estimate, while pre-approval involves a credit check and is a stronger indicator of your budget.
3. Assemble Your Team: You will need a real estate agent experienced with new construction, a licensed general contractor, and potentially an architect. These professionals represent your interests and ensure the project meets standards.

To save money, consider choosing a stock design plan, undertaking some DIY projects like painting, or leaving spaces like basements unfinished for later completion.

Building a home is a major undertaking that requires careful financial planning and patience, but it results in a home tailored to your specific needs. Purchasing an existing home is often a faster, more straightforward path to homeownership. Your final choice should align with your financial reality, timeline, and vision for your first home.