Budgeting for a New Construction Home: The Hidden Costs

The price sheet isn't the whole budget. Plan for closing costs and deposits, things the home may not include like blinds and some appliances, HOA charges at closing, and a property tax bill that can rise once the finished home is assessed.

What are the hidden costs of buying a new house?

The costs most people miss fall into four buckets.

Up front, before closing

• Earnest money. Freddie Mac puts it at roughly 1% to 2% of the purchase price. It's usually credited back to you at closing. New construction contracts often add a separate deposit for options or upgrades.
• Inspection. Freddie Mac estimates $300 to $500 for a standard home inspection. On new construction, some buyers do two: one before drywall and one before closing.

At closing

• Closing costs. Freddie Mac estimates 2% to 5% of the purchase price. Builder credits can offset part of it.
• Prepaid items. Your first year of homeowners insurance and an initial deposit into your escrow account.
• HOA charges. Many communities collect a one-time fee at closing on top of the first dues. Ask what it is.

Right after you move in

• Window coverings. Many new homes come without blinds.
• Appliances. Some homes don't include a refrigerator, washer or dryer.
• Outdoor extras. A fence, a bigger patio, landscaping beyond the basics. Check what your HOA allows before you buy.
• Furniture for a bigger home. More rooms fill up fast.
• Utility setup. Some providers charge deposits or connection fees.

In year two

• The property tax step-up. More on this below. It's the one that surprises people most.

What is typically not included with new build houses?

It varies by builder, plan and community, so ask for the standard features list in writing. The items most often left out:

• Blinds or window treatments
• A refrigerator, washer and dryer
• Fencing
• Landscaping beyond the builder's basic package
• Gutters on every side (on some homes)
• Upgraded lighting, ceiling fans or outlets you assumed would be there
• A finished patio size or covered porch you saw in the model

Model homes are decorated to sell. The model often shows upgrades and furniture that aren't standard. Ask "Is this included?" about anything you like.

The property tax step-up

North Carolina lists and values property as of January 1 each year. A new home finished in, say, June is taxed that year on what stood there on January 1. Often that's just the lot or a partly built house.

The next year, you're taxed on the finished home. If your escrow was set up using the smaller bill, your monthly payment can rise at the first escrow review, and you may owe a shortage.

Ask your lender to estimate escrow based on the finished home's likely value. That avoids the surprise.

What is the 3-3-3 rule for buying a house?

It's an informal rule of thumb, not an official guideline, and people define it differently. The versions I hear most combine three ideas:

• Keep a cash cushion, often described as about three months of expenses, after closing.
• Plan to stay put at least three years, so buying costs have time to pay off.
• Keep your total debts at a level you can carry.

The spirit is right: don't drain your savings to close, and don't buy a home you'll need to sell soon. Treat it as a gut check, then get real numbers from a lender.

What salary to afford a $400,000 house?

There's no single answer. It depends on your rate, your down payment, taxes, insurance, HOA dues and your other debts.

Lenders use your debt-to-income ratio, which is your monthly debts, including the new housing payment, divided by your gross monthly income. The CFPB notes that limits vary by loan and lender. Fannie Mae's guidelines, for example, top out at 36% on manually underwritten loans, up to 45% with strong credit and reserves, and up to 50% through its automated system.

Use those as ceilings. Then build your budget on the full monthly cost, including the items above, not just the loan.

A simple way to plan

Make two lists before you sign:

1. One-time costs: earnest money, option deposits, inspections, closing costs, HOA fees at closing, blinds, appliances, moving.
2. Monthly costs: your full payment, utilities, HOA dues, and a set-aside for upkeep and that year-two tax change.

If both lists still work with savings left over, you're in good shape.

Who's writing this. I sell new homes for D.R. Horton at Collins Ridge in Hillsborough, so I represent the builder, not you. This guide is general education from my years on job sites and in sales. It isn't legal, tax or lending advice, and it doesn't describe any specific home, price or incentive. Check the sources linked below, and talk with your own lender, agent or attorney before you decide.