New Construction Closing Costs

Key Components of New Construction Closing Costs in Texas

When purchasing a newly constructed home, understanding the individual components of closing costs is critical. Below, we provide an in-depth explanation of each key cost category, why it matters, and how it impacts your bottom line. 

1. Owner’s Title Policy

The owner’s title policy protects both the buyer and the lender from potential disputes over property ownership. For newly constructed homes, this policy ensures the buyer has a clear and undisputed claim to their home.

Why It’s Important: Title issues, such as liens or boundary disputes, can arise unexpectedly. The policy safeguards your investment and prevents future legal complications.
Who Pays?: In Texas, the buyer often pays for the owner’s title policy in new construction. However, many builders provide incentives, such as covering this cost if you use their preferred lender.
Cost Estimate: The cost of the title policy can be significant. While rates are regulated by the state, a rough estimate is 0.75% of the loan amount. To calculate:
Subtract $100,000 from the loan amount, multiply by 0.00554, and add $875.
Builder Concessions: Builders may offer credits or discounts to offset this cost. High-end custom builders, however, rarely offer these incentives.

2. Appraiser’s Final Inspection

For new construction, a final inspection is often required as part of the appraisal process. This inspection verifies that the home has been completed as planned and meets all requirements before funding.

What Is It?: A follow-up visit by the appraiser to confirm all construction and installations are finalized.
Why It’s Necessary: If the initial appraisal occurs while the home is still under construction, the lender will need confirmation that everything is complete and move-in ready.
Cost Estimate: Typically $175 to $200, added to the standard appraisal fee.
When It’s Required: This cost applies only if the home isn’t finished at the time of the first appraisal. Buyers purchasing completed homes may not incur this cost.

3. HOA Transfer Fees

If your new home is in a community managed by a homeowners association (HOA), you’ll likely encounter one-time HOA transfer fees. These fees fund the HOA’s reserves and administrative setup.

Purpose: Ensures the HOA is financially prepared to maintain shared spaces, enforce community rules, and handle administrative tasks.
What It Covers: Administrative fees, reserve funding, and “welcome to the neighborhood” costs.
Cost Estimate: Typically ranges from $700 to $1,400, depending on the community’s size and amenities.
Why It Varies: Luxury communities with extensive amenities (e.g., pools, clubhouses) may have higher fees than smaller neighborhoods with limited facilities.

Tip: Check with the builder’s representative to understand the HOA fees specific to your community. These fees are often non-negotiable but provide long-term benefits through proper community maintenance.

4. Final Property Survey in Texas

In Texas, a property survey is required for financing. For newly constructed homes, the final survey provides a detailed outline of the property’s boundaries, easements, and structures.

Why It’s Required: Ensures the property lines are accurate and that there are no encroachments or violations.
What It Includes: A one-page document showing the lot’s boundaries, the home’s placement, and any shared property elements like fences or utility easements.
Who Pays?: The buyer typically covers the survey cost for new construction.
Cost Estimate: Approximately $450 to $550, depending on the lot size and complexity.
For Existing Homes: Sellers often provide an existing survey, eliminating this cost.

5. New Construction Escrows and Tax Prorations

Tax prorations and escrow payments for newly constructed homes can be complex due to the timing of property value assessments and completion dates.

Why It’s Complicated: In Texas, property tax assessments are based on the home’s value as of January 1st of the tax year. If the home wasn’t complete on that date, taxes may initially be calculated on the land value only.
Tax Prorations: At closing, buyers may need to pay taxes based on the home’s future assessed value. The exact amount depends on when the home was completed and local tax rates.
Escrow Adjustments: If taxes are underestimated during the first year, buyers may face escrow shortages in subsequent years.
How to Prepare: Consult with your lender and title company to understand potential prorations and escrow requirements. This ensures there are no surprises after closing.

6. Additional Considerations

Builder Incentives: Many builders offer financing incentives, such as covering title policy costs or contributing to closing costs, when buyers use their preferred lender. Always compare these offers against other lenders to ensure you’re getting the best deal.
Custom Builders: Buyers working with custom builders may not receive the same level of incentives. Be prepared to cover more closing costs out-of-pocket in these scenarios.
Prepaid Expenses: In addition to these costs, buyers should budget for standard prepaids, such as homeowners insurance and property taxes.