Choosing a Builder / Contractor

For those of you worried about choosing a general contractor to build your new home, feel confident in knowing that most custom home contractors are reliable, honest individuals. The very few who are not, have created an image well beyond their real numbers. To help you find the right GC for your new home, here are some very simple rules and suggestions to follow: 

• Never choose a contractor based solely on lowest price.
• Always obtain more than one estimate.
• Don't rely on possible legal remedies as your protection against someone you are apprehensive about to begin with. Simply don't hire that particular contractor. 
• Research their background first before hiring them. if your state has a licensing board for contractors, call to find out if there are any outstanding complaints against that license holder.
• Call your local Better Business Bureau to see is there are any complaints on file.
• Don't be afraid to thoroughly interview the contractor candidates. Ask what kind of worker's compensation insurance they carry and get their policy number and insurance company contact information so that you can verify everything. if they are not covered, you could be liable for any work-related injury incurred during the project.
• Be sure that the contractor also has an umbrella general liability policy.
• Don't hire the contractor that only suggests changes that will reduce the price -  and possibly the quality - or the contractor who does the opposite and only makes suggestions that will result in expensive changes.
• Choose a contractor based heavily on past performance. Ask for names of clients and follow- up with phones calls and drive- bys if possible. A good contractor will be happy to provide as many referrals as you want. 
• Choose a contractor based on recommendations of local business owners he deals with such as bankers, material suppliers or local officials. 
• Choose a contractor who appears knowledgeable and has a helpful attitude and will have your best interest at heart.
• Use common sense judgment. 
• Finally, don't be rushed into making a decision, no matter how competitive the market may seem. And never pay a deposit to a contractor at the first meeting.

Experts agree these 15 questions are a great place to start to help you select the right builder for your new home. 

Selecting the right builder is a key step in the journey that leads you to your dream home. Asking builders, the 15 questions below will help you choose the right builder to create your new home - and give you confidence in your choice. These questions will also help you better understand key steps in the building process and the choices you'll make in partnership with the builder, to bring your new home to life. 

• Are you a licensed insured?
• How do you compare yourself to other builders? What are the most important benefits of the homes you build? 
• What type of warranty do you offer? 
• Can you give me refences from prior home buyers? Do you build model homes I can tour? If not, can you help me make an appointment to see a home you built for another customer?
• What are major energy- saving features of homes you build?  
• Do you build only from home plans you supply? Or can i provide my own set of plans?
• What standard features do your homes include? What options and upgrades can I select? 
• Who will oversee the construction of my home? Who should I contact with any questions that I may have? 
• How and when can I make changes or upgrades before and during construction? 
• How and when will the final price for my home be determined?
• How often (and when) will I have access to the home during the building process?  
• How long will my home take to complete? 
• Does the community have a Homeowners Association? If so, may i get a copy of their rules and the amount of any fees? 
• What's your process for inspection at key points of construction, at final walk-though, and to address any matters that need to be corrected or finalized? 

There may be other important questions you wish to ask, so feel free to add them. However, experts agree the list above is a great starting point to select the firm to build your new home. 

Congratulations!  You've embarked on the exciting journey that will lead you to your dream home. As you progress through each stage - finding, buying, designing and building your new home - there are many great resources here that can help you! 

If you are thinking of buying a new home, you must pay close attention to many details to ensure that you find one that will suit your needs and preferences. Before you start shopping, you should sit down with the members of your household to discuss your preferences and the many options available to you. Here are some things you should consider:

Step 1: Financing Your Home

The first step in the home buying process is determining how much you can afford. Check out our “Advice for Financing Your First Home” to learn more about how you can prepare for the financing process. To ensure that the financing process goes smoothly, buyers should consider pre-qualifying for a mortgage and having a financing commitment in place before shopping for a new home.

Step 2: Prioritizing Most-Wanted Features

Before you start shopping, you should sit down with the members of your household to discuss your preferences and the many options available to you.

An easy way to organize your thoughts is to write each separate feature that you want on a 3X5 card, and arrange the cards in order of their importance to you. For instance, if you like to cook, you may want a home with a large, well-equipped kitchen. Or you may settle for a small kitchen, so that you can have extra space for a library, office or playroom. 

Some home buyers seek large, open interior spaces, while others prefer traditional rooms that afford more privacy. 

While looking for a home, consider whether your needs are likely to change over time. If you plan to add rooms, find out if there is enough space on your site for such expansion and whether such additions are permitted by your local jurisdiction.

Step 3: Selecting the Type of Home

Options include single-family homes and condominiums. Some home buyers prefer homes with large yards. Others opt for condominiums where they can avoid yard maintenance entirely. 

With a single-family home in a development, you'll be responsible for your own yard and home, but may be restricted to certain design elements or other regulations if there is a home owners association. 

A condominium is a home in a multi-unit complex, such as an apartment building or a townhouse cluster. You own the home, and you and your neighbors jointly own the common elements, such as the land around the complex, the parking areas, building exteriors, hallways, utility pipes and recreational facilities. A condominium owners association is responsible for maintaining the jointly owned elements. The day-to-day business of the complex is generally handled by a managing agency.

• Learn more about the types of home construction

Step 4: Starting Your House Hunt

Now that you know the type of home and features you are looking for, and how much home you can afford, you're ready to begin searching for your perfect home. Whether you use a realtor to find an existing home or work with a builder to buy a new home, you'll be more focused with your search. Here are a few additional resources to help you navigate the home-buying process.

Buying your first house is very exciting. But financing your home purchase can be a daunting experience. In both cases, do your research and shop carefully to ensure you find exactly what you want and need. 

Deciding how much to spend on your home and which type of mortgage will work best for you — as well as understanding the settlement process — can be confusing. However, there are many sources that can help you get prepared well before you step foot into a sales office, model home or open house.

• Get familiar with the lingo. NAHB's Home Buyer’s Dictionary can help you.   
• Figure out what you can actually afford to pay on a monthly basis. Remember that, in addition to the monthly principal and interest, you will also pay into escrows for property taxes, hazard insurance and possibly a home owners' or condominium association assessment. You have more knowledge about your living expenses than a lender. Hold firm with that number and don’t be tempted to agree to an amount higher than what you are comfortable spending. Mortgage calculators are a great way to figure out what your monthly payments would be based on interest rates and down payment amounts. Calculators can be found on most real-estate-focused websites. 
• Pay down your debts. Credit card debt limits what you qualify for from a lender. Lenders want to see a total debt service ratio that is less than 40% of your monthly income.   
• Attend a first-time home buying seminar or talk to a credit counselor who does not work for a lender. You can research your options without being influenced by someone who has a financial interest in the home or loan you choose. The U.S. Department of Housing and Urban Development (HUD) offers free housing counseling and seminars.   
• Check out government resources. HUD also has a helpful web page, Common Questions from First-time Homebuyers, which provides additional resources for first-time buyers, including special financing options and HUD programs.
• Select your lender and get pre-approved. When you have done your research and are ready to move on to the next step, visit a lender, understand the loan choices that would be available to you, and, once you’ve determined the most suitable loan, get pre-approved for that loan. Since you will already know how much money you can borrow, you will know what price range you should look at and can move quickly if you are bidding on a house that has several interested buyers. A lender’s pre-approval would still be subject to a final verification of your credit and a satisfactory appraisal, but it’s a big step toward becoming a home owner.

ARM? GPM? PITI? You’d have to be a cryptologist to figure out some of the terms buyers encounter during the home buying process. Doing research on how to buy a house before beginning the process can greatly improve your experience and prepare you for the exciting course ahead. And with this glossary of home buying terms at your side, you can rest easy that your new home won’t get lost in translation.

• Adjustable Rate Mortgage (ARM). A loan whose interest rate is adjusted according to movements in the financial market.
• Amortization. A payment plan by which a borrower reduces a debt gradually through monthly payments of principal and interest.
• Annual Percentage Rate (APR). The annual cost off credit over the life of a loan, including interest, service charges, points, loan fees, mortgage insurance, and other items.
• Appraisal. An evaluation to determine what a piece of property would sell for in the marketplace.
• Appreciation. The increase in the value of a property.
• Assessment. A tax levied on a property or a value placed on the worth of property by a taxing authority.
• Assumption. A transaction allowing the buyer of a home to assume responsibility for an existing loan on the home instead of getting a new loan.
• Balloon. A loan which has a series of monthly payments (often for 5 years or less) with the remaining balance due in a large lump sum payment at the end.
• Binder. A receipt for a deposit paid to secure the right to purchase a home at terms agreed upon by the buyer and seller.
• Buydown. A subsidy (usually paid by a builder or developer) to reduce the monthly payments on a mortgage loan.
• Cap. A limit to the amount an interest rate or a monthly payment can increase for an adjustable rate loan either during an adjustment period or over the life of the loan.
• Certificate of Occupancy. A document from an official agency stating that the property meets the requirements of local codes, ordinances, and regulations.
• Closing. A meeting to sign documents which transfer property from a seller to a buyer. (Also called settlement)
• Closing Costs. Charges paid at settlement for obtaining a mortgage loan and transferring real estate title.
• Conditions, Covenants, and Restrictions (CC and Rs). The standards that define how a property may be used and the protections the developer has made for the benefit of all owners in a subdivision.
• Condominium. A home in a multi-unit complex; each purchaser owns an individual unit, and all the purchasers jointly own the common areas, such as the surrounding land, hallways, etc.
• Conventional Loan. A mortgage loan not insured by a government agency (such as FHA or VA).
• Convertibility. The ability to change a loan from an adjustable rate schedule to a fixed rate schedule.
• Cooperative. A form of ownership in a multi-unit complex; the purchasers own shares of the entire complex rather than owning individual units.
• Credit Rating. A report ordered by a lender from a credit bureau to determine if the borrower is a good credit risk.
• Default. A breach of a mortgage contract (such as not making monthly payments).
• Density. The number of homes built on a particular acre of land. Allowable densities are usually determined by local jurisdictions.
• Downpayment. The difference between the sales price and the mortgage amount on a home. The downpayment is usually paid at closing.
• Due-on-Sale. A clause in a mortgage contract requiring the borrower to pay the entire outstanding balance upon sale or transfer of the property. A mortgage with a due-on-sale clause is not assumable.
• Earnest Money. A sum paid to the seller to show that a potential purchaser is serious about buying.
• Easement. Right-of-way granted to a person or company authorizing access to the owner’s land; for example, a utility company may be grated an easement to install pipes or wires. An owner may voluntarily grant an easement, or in some cases, be compelled to grant one by a local jurisdiction.
• Equity. The difference between the value of a home and what is owed on it.
• Escrow. The handling of funds or documents by a third party on behalf of the buyer and/or seller.
• Federal Housing Administration (FHA). A federal agency which insures mortgages that have lower downpayment requirements than conventional loans.
• Fixed Rate Mortgage. A mortgage whose interest rate remains constant over the life of the loan. The payments are not necessarily level. (See Graduated Payment Mortgage and Growing Equity Mortgage).
• Fixed Schedule Mortgage. A mortgage whose payment schedule for the life of the loan is established at closing. The payments and interest rate are not necessarily level.
• Graduated Payment Mortgage (GPM). A fixed-rate, fixed-schedule loan which starts with lower payments than a level payment loan; the payments rise annually over the first 5 to 10 years and then remain constant for the remainder of the loan. GPMs involve negative amortization.
• Growing Equity Mortgage (Rapid Payoff Mortgage). A fixed-rate, fixed-schedule loan which starts with the same payments as a level payment loan; the payments rise annually, with the entire increase being used to reduce the outstanding balance. No negative amortization occurs, and the increase in payments may enable the borrower to pay off a 30-year loan in 15 to 20 years, or less.
• Hazard Insurance. Protection against damage caused by fire, windstorm, or other common hazards. Many lenders require borrowers to carry it in an amount at least equal to the mortgage.
• Housing Finance Agency. A state agency which offers a limited amount of below-market-rate home financing for low-and moderate-income households.
• Index. The interest rate or adjustment standard which determines the changes in monthly payments for an adjustable rate loan.
• Infrastructure. The public facilities and services needed to support residential development, including highways, bridges, schools, and sewer and water systems
• Interest. The cost paid to a lender for the use of borrowed money.
• Joint Tenancy. A form of ownership by which the tenants own a property equally. If one dies, the other would automatically inherit the entire property.
• Level Payment Mortgage. A mortgage whose payments are identical for each month over the life of the loan.

• Mortgage Broker. A broker who represents numerous lenders and helps consumers find affordable mortgages; the broker charges a fee only if the consumer fins a loan.
• Mortgage Commitment. A formal written communication by a lender, agreeing to make a mortgage loan on a specific property, specifying the loan amount, length of time and conditions.
• Mortgage Company (Mortgage Banker). A company that borrows money from a bank, lends it to consumers who want to buy homes, then sells the loans to investors.
• Mortgagee. The lender who makes a mortgage loan.
• Mortgage Loan. A contract in which the borrower’s property is pledged a s collateral and which can be repaid in installments over a long period. The mortgagor (buyer) promises to repay principal and interest, to keep the home insured, to pay all taxes, and to keep the property in good condition.
• Mortgage Origination Fee. A charge by a lender for the work involved in preparing and servicing a mortgage application (usually 1 percent of the loan amount).
• Negative Amortization. An increase in the outstanding balance of a loan when a monthly payment is not large enough to cover all of the interest due.
• Note. A formal document showing the existence of a debt and stating the terms of repayment.
• PITI. Principal, interest, taxes, and insurance (the 4 major components of monthly housing payments).
• Point. A charge of 1 percent of the mortgage amount. Points are a one-time charge assessed by the lender at closing to increase the interest yield on a mortgage loan.
• Prepayment. Payment of all or part of a debt prior to its maturity.
• Principal. The amount borrowed in a loan, excluding interest and other charges.
• Property Survey. A survey to determine the boundaries of your property. The cost will depend on the complexity of the survey.
• Rapid Payoff Mortgage. (See Growing Equity Mortgage).
• Recording Fee. A charge for recording the transfer of a property, paid to a city, county, or other appropriate branch of government.
• Real Estate Settlement Procedures Act (RESPA). A federal law requiring lenders to provide home buyers with information about known or estimated settlement costs. The act also regulates other aspects of settlement procedures.
• R-Value. The resistance of insulation material (including windows) to heat passing through it. The higher the number, the greater the insulating value.
• Sales Contract. A contract between a buyer and seller which should explain, in detail, exactly what the purchase includes, what guarantees there are, when the buyer can move in, what the closing costs are, and what recourse the parties have if the contract is not fulfilled or if the buyer cannot get a mortgage commitment at the agreed-upon terms.
• Settlement. (See Closing).
• Shared Appreciation Mortgage. A loan in which partners agree to share specified portions of the downpayment, monthly payment, and appreciation.
• Tenancy in Common. A form of ownership in which the tenants own separate but equal parts. To inherit the property, a surviving tenant would either have to be mentioned in the will or, in the absence of a will, be eligible through state inheritance laws.
• Title. Evidence (usually in the form of a certificate or deed) of a person’s legal right to ownership of a property.
• Transfer Taxes. Taxes levied on the transfer of property or on real estate loans by state and/or local jurisdictions.
• Veterans Administration (VA). A federal agency which insures mortgage loans with very liberal downpayment requirements for honorably discharged veterans and their surviving spouses.
• Walk-Through. A final inspection of a home before settlement to search for problems that need to be corrected before ownership changes hands.
• Warranty. A promise, either written or implied, that the material and workmanship of a product is defect-free or will meet a specified level of performance over a specified period of time. Written warranties on new homes are either backed by insurance companies or by the builders themselves.
• Zoning. Regulations established by local governments regarding the location, height, and use for any given piece of property within a specific area.

Settlement (or closing) is the process that passes ownership of a property from seller to purchaser. Going to settlement on a new home can be bewildering. Home buyers are usually required to sign a seemingly endless pile of documents, most of which are written in terminology not used outside of the housing industry and that can be complicated to understand.

Be an informed home buyer during every step of the settlement process:

Before You Go to Settlement

Before closing day, there are certain important items you should know about so that you can achieve the best possible terms for yourself in the transaction.

• Ask a lender for a copy of the HUD pamphlet, "Buying Your Home: Settlement Costs and Helpful Information," or access it HUD's website. Most lenders are required to provide their loan applicants with a copy of this document under the Real Estate Settlement Procedures Act (RESPA), but you will be able to shop more wisely for settlement services if you have read the pamphlet before you apply. It provides a good description of the settlement process and explains most of the expenses you will encounter.
• When you apply for a loan, the lender is required by law to provide you with a good faith estimate of settlement costs. Shortly before settlement, you will be told exactly how much you owe so that you can get a bank check. A personal check is generally not acceptable. In some instances, you may have money returned to you instead of having to pay.
• Before you go to settlement, familiarize yourself with important settlement terms.

Important Settlement Terms

Appraisal Fee. An appraisal is an estimate of the fair market value of your home. Appraisals help both the lender and the buyer to determine if the sales price is consistent with the actual value. An appraiser inspects the house and the neighborhood and makes an estimate based on the price of comparable houses and other factors. The appraisal provides no guarantee that the property is free of defects. Lenders insist on an appraisal to see how much they could recover by selling your house if you default. The fee for this service may vary considerably depending on the specific characteristics of your house.

Attorney’s Fees. If the lender requires an attorney to draw up any of the settlement documents, you may be charged a fee – a flat amount or a percentage of the loan. If you hire a lawyer to assist with the settlement, you will have to pay an additional fee at or immediately following settlement.

Credit Report. The lender may charge a fee for investigating your credit history.

Earnest Money. Earnest money is a deposit paid to a seller to show you are serious about buying a house. Your receipt for this payment is called a binder. If you later buy the home, the earnest money is applied to your downpayment. If not, the earnest money is returned, minus expenses for processing. Be sure that you understand the refund procedures before you make a deposit.

Escrow Fees and Accounts. Escrow involves having a third party hold funds and/or documents until you and the seller complete settlement. Depending on the circumstances of your loan, you may be asked to make monthly payments to an escrow account after you purchase your home. Money in the account may be used to pay taxes, insurance, and any other regular assessments as they fall due. Such accounts serve a similar purpose to withholding income tax from your paycheck; by putting aside money each month, you avoid large annual or semiannual payments. You may be charged a fee for the service. In some states, escrow accounts draw interest.

Sometimes, escrow agents handle settlements. Rather than you and the lender meeting to sign all of the documents and transfer money, the agent works with you and the lender separately to ensure that everything is done properly. Once again, a fee is required for this service.

Loan Origination Fee. A lender will charge a fee for the cost of processing the loan, usually calculated as percentage of the loan amount.

Loan Discount (Points). The largest of your settlement cost may be the "points" lenders require to make the yield on your loan more profitable. A point is one percent on your loan amount. If you are borrowing $50,000, one point equals $500. Points are tax deductible if they are paid separately and not deducted from the loan amount. For VA loans, you can be charged a maximum of one point, but the number of points can be higher for FHA and conventional loans.

On a 30-year loan, each point that you pay reduces your interest rate by roughly 1/8 of a percent. You may be faced with a choice between two mortgages in which one has lower monthly payments but involves paying more points up front. Annual percentage rate calculation include buyers’ points, so ask for the APR to help you make your assessment. Keep in mind that an APR is calculated on the basis of the total life of the loan. For a 30-year loan, the APR is a 30-year composite figure. If you sell your new home after a few years, the average annual cost of your points will be much higher than is reflected in the APR. If you plan to move soon, you might be better off with a loan that has a slightly higher rate but fewer points.

Property Survey Fee. You may have to pay to have your lot surveyed, especially if there is a question about the boundaries. The cost will depend on the complexity of the survey.

Recording Fee. Because the title is changing hands, the transaction must be recorded with your city, county, or other appropriate branch of government. The fee covers administrative costs.

State and Local Transfer Taxes. Some jurisdictions levy taxes on the transfer of property or on real estate loans.

Settlement Costs Between Buyer and Seller. Your builder may have already paid the annual property taxes on your new home or "filled up your fuel tank." When the title changes hands, you must reimburse the builder for a proportional share of the taxes, any fuel that remains in the tank, and any other prepaid costs.

Title Search and Insurance. A title search involves having someone look through public records to see if anyone else has a claim to your property. A lender does not want to lend you money only to learn in the event of foreclosure that somebody other than you has a prior claim to the property.

You will normally be required to purchase lenders’ title insurance to guard against a faulty title search as well as hazards that even the most thorough search will not reveal – such as a forged deed that does not transfer title, a claim by a previously undisclosed relative of a former owner, or a mistake in the records. For a one-time premium at closing, title insurance will clear up title problems, pay the lender’s legal expenses for defending against an attack on title, or pay claims on property the lender may lose.

Lenders’ title insurance does not compensate buyers for any legal expenses they might incur, or the value of property they might lose. A separate owners’ title insurance is available to safeguard the buyer. Whether the seller or the buyer pays for owners’ title insurance depends on local custom.

This list of settlement terms is not all-inclusive. You may also be charged fees for notarizing documents and other miscellaneous items.

Key Settlement Documents

Once all the forms have been signed, you can move into your new home. But before ending the settlement session, make sure that you have received or will be sent copies of all the important documents, including:

• Sales contract
• Land survey
• Warranties and instruction booklets from manufacturers for equipment in the house
• All tax payment receipts
• Certificate of occupancy (required in some areas)
• Certificates from the health department for plumbing and sewer installations (required in most areas)
• Other certificates of code compliance (required in most areas)
• All insurance policies (some might be sent later after they have been properly endorsed)
• The note and deed to your property (which will probably be mailed to you after being placed on record in your local registry of deeds office)
• Home maintenance and care instructions from your builder