How Mortgage Rate Buy-Downs and Builder Incentives Can Make New Construction More Affordable

One of the first things home shoppers learn is that the price they see on real estate listings is nearly always negotiable. And that same flexibility exists when buying a newly built home, too, in the form of builder incentives.

Builder incentives are promotions offered by developers that, much like a coupon, cut the cost of purchasing property in that community. Incentives are increasingly common today to entice cash-strapped buyers to make an offer, yet these discounts aren’t always as simple as a straight price cut.

Here’s a guide to help homebuyers understand the various types of incentives, when and why they’re offered, and how to make the most of these deals today.

What are builder incentives, and when are they offered?

Many builder incentives are widely advertised on splashy billboards and online to capture the attention of buyers and reel them in. Examples might range from “For a limited time, get $5,000 in designer upgrades!” to “Purchase before X date, and we’ll pay all of your closing costs.”

“You will find these incentives explained on websites, social media, signs, and other places a builder might advertise to the public,” explains Kimberly Mackey, founder of New Homes Solutions and a sales and marketing management consultant specializing in residential homebuilding.

Homebuilders may offer incentives at any stage of the project’s development. Many happen at the initial launch to help generate buzz for a new community and get the first few residents on board. Incentives are also commonly offered near the end of a project when there are only a few homes left to sell, since builders might be eager to close the books.

Overall economic conditions that might slow home sales (such as high interest rates or a recession) might also spur builders to work harder to get buyers through their door. The type of incentive will vary based on what builders think will strike a chord with the target homebuyer at that time.

“For example, if the economy is struggling, lower interest rates and cash at close may help buyers qualify that would otherwise be unable to afford a particular community,” says Bob Seeman, vice president of sales, new homes at Realtor.com®. “If it’s a high-end community, then property upgrades are more likely to be a successful incentive.”

While many incentives are widely advertised, others are not and are discretionary. The only way buyers will know if this incentive exists is if they or their real estate agent asks for it.

“Occasionally, builders may have some wiggle room to provide to a buyer something like a refrigerator—new construction doesn’t always include one—or blinds, or something along those lines, to incentivize a buyer further to make a move during a specific time frame, like by the end of the month or quarter,” says Mackey. “If the builder has it, the builder’s sales representatives will know how to handle the question and they are generally happy to help the buyer as much as possible.”

How financial incentives with builders work

While builder incentives may be found as price cuts on the actual house, homebuyers may more commonly see offers to help reduce costs on the financing front, with builders offering to buy down the interest rate on the home loan or pay some or all closing costs.

One caveat to keep in mind, though, is that these deals are typically tied to financing through a builder’s preferred lender. Builders often work closely with certain lenders because they want to know that the loan will close without delay once the home is completed.

“It is expensive to carry a finished home, so the builder wants to get it off their books as soon as possible,” says Mackey.

While buyers can always bring in a lender of their own choosing, these borrowers will typically be forfeiting any builder financing incentives and may end up out more money at closing as a result.

“If the builder doesn’t pay this incentive, then the buyer could have to pay all the closing costs, which typically adds around 3% of the purchase price,” says Mackey. However, she also says it’s always smart to shop around and compare offers from several lenders or brokers, just to make sure the builder’s terms are truly the best deal you can get.

Homebuyers who do find better financing terms with an outside lender should be aware that if that loan isn’t ready to close at the specified time the builder is prepared to turn the home over, buyers could face closing delay penalties, which could be hundreds of dollars per day.

“With the builder’s lender, if they can’t close, the buyer would not be on the hook for those delay fees,” says Mackey.

Whether you end up using the builder’s lender or not, Mackey always recommends buyers read the fine print of any incentive they agree to, since it may contain small conditions that may be easy to overlook in the rush and excitement to close the deal.

“There may be a caveat to these incentives, such as a ‘must close by date’ that may not be in the buyer’s control if the home isn’t finished,” warns Mackey. “Buyers should get, in writing, what happens if that home completion falls out of that date range.”

There’s also the possibility that a home loan may be delayed or fall through due to mortgage approval problems, which might occur if the buyer suddenly changes jobs at the last minute or makes a big purchase like a car. Generally, it’s best to come to the closing table having made no significant recent changes that would affect your finances.

Why builder incentives are on the rise today

During the red-hot market that began during the COVID-19 pandemic, when record levels of Americans were moving, builders didn’t have to offer many (or any) incentives for the homes they were building. Now that things are leveling a bit, however, homebuyers are starting to see a few more perks being thrown their way.

“In general, builders face similar conditions to other home sellers when it comes to pricing, and although home shoppers are interested, current mortgage rates, which are more than double year-ago levels, have drastically reduced affordability,” says Danielle Hale, chief economist for Realtor.com.

“Higher costs and uncertainty about the economic outlook have made home shoppers who can navigate today’s housing market more selective, bringing demand much more in line with supply than we’ve seen in recent years,” she adds.

“In most cases, builders today are offering incentives at every phase of a project’s development or sales cycle,” says Kelly Zuccarelli, national builder and condominium program manager for Wells Fargo Home Mortgage.

How to take advantage of builder incentives today

With interest rates on a 30-year fixed-rate mortgage more than double what they were a year ago and currently in the 7% range, Zuccarelli says they’re currently seeing builder incentives focused almost exclusively on providing buyers with a more affordable monthly payment.

One possible incentive that may be offered is a permanent interest rate buy-down, funded by the builder, that creates a lower monthly payment for homebuyers and reduces financing costs over the life of the loan. Another incentive being offered is extended interest rate locks, paid for by builders, which allow homebuyers to lock in today’s interest rates and insulate themselves against any future rate increases.

One other really interesting financing incentive homebuyers should know about is that some builders actually purchased “rate locks” when rates were lower than they are today and can offer loans below current market rates to their buyers.

Zuccarelli suggests that buyers worried about current interest rates may wish to seek out builders who purchased rate locks before mortgage rates started heading up.

That said, Seeman points out that current incentives are likely to be short-lived.

“You’ll notice most of the incentive programs are time-boxed in order to give builders as much flexibility as possible to adapt and adjust incentives depending on market conditions,” says Seeman. “As a result, if a buyer is ready to move, we recommend grabbing a good incentive when they see it.”

For this and related articles, please visit Realtor.com