Building a new construction home frequently takes at least a year. So, when is your down payment actually due? Do you need to pay everything upfront?
The down payment for a new construction home is typically due when the home has been built and you have completed the purchase. But you may be required to make a deposit beforehand.
That being said, you may be making the majority of this deposit with your new construction loan, if you aren’t paying for your new home in cash.
Let’s look at new construction homes, down payments, and your financial obligations.
How to Finance a New Construction Home
If you’re planning to finance your new construction home, you will need to apply for a new construction loan. This is different from a regular mortgage loan; you need to fund the development of the property while it’s being built.
Construction loans are typically short-term loans with variable interest rates. You will make interest-only payments during the construction phase and then pay off the loan in full once the home is complete.
But you don’t have to pay that loan off in cash. Most people don’t. Instead, they roll the construction loan into a traditional mortgage. Either you have a single-closing loan (a construction loan that turns into a traditional mortgage) or a two-closing loan (a construction loan followed by a separate traditional loan).
The down payment is just one piece of the puzzle. You will also need to factor in the cost of the land, the cost of construction, and the cost of the mortgage itself, such as origination fees. Some builders won’t even build unless you’ve already purchased the land.
And when do you actually pay the down payment? In part, it depends on the type of loan you have.
The Difference: Single Closing vs. Two Closing Loans
With a single closing loan, the borrower takes out one loan to finance both the construction and the mortgage. The interest rate is set at the time of closing and does not change during construction.
The advantage of a single closing loan is that it simplifies the process for both the borrower and the builder. There is only one loan to close and only one set of closing costs. You will only need to pay a down payment once.
The disadvantage of a single closing loan is that the borrower pays interest on the entire loan amount from the time of closing.
With a two-closing loan, the borrower takes out a construction loan to finance the construction of the home. Once construction is complete, the borrower takes out a mortgage loan to finance the purchase of the home.
The advantage of a two-closing loan is that the borrower only pays interest on the amount of money they are using during construction.
The disadvantage of a two-closing loan is that it requires two separate loans… and two sets of closing costs. Plus, the borrower has to qualify for both loans.
Which type of loan is right for you will depend on your personal situation. Most borrowers prefer a one-closing loan. With a two-closing loan, there is always the risk that you could fail to qualify for a loan once your property has been completed.
How Much of a Down Payment does a New Construction Home Require?
The short answer is that it depends. It depends on the type of loan you get, the terms of that loan, and the size of your down payment.
For a conventional mortgage loan, the minimum down payment is 5%. But most conventional mortgages won’t dip below 10% unless you have a very solid credit history. For a construction loan, it’s often 20 to 30%.
There are other options. For instance, the FHA new construction loan requires only a 3.5% down payment, just like any other FHA loan. The caveat though is that many builders don’t want to work with an FHA new construction loan. The requirements for building and planning are fairly strict.
Likewise, the USDA offers a one-time close loan with no down payment and the closing costs themselves can be rolled into the costs of the loan. But it’s extraordinarily difficult to qualify for and a lot of builders don’t want to work within the USDA’s restrictions.
These low down payment loans are generally focused on first-time homebuyers and low-income or moderate-income households. So, qualifying isn’t so much an issue of having a solid financial picture and credit score as it is need-based. Other alternatives include a VA Loan or a FannieMae HomeReady loan, both of which provide one-time close options.
New Construction Homes and Builder Deposits
When you buy a new construction home, you will likely have to put down a deposit on the home. This deposit is not the down payment. It is typically due when you sign the purchase contract. The deposit is generally a percentage of the total price of the home and is paid to the builder as a show of good faith that you are committed to buying the home.
This builder deposit will ultimately go toward the final costs of building the home, in the form of your down payment. Until then, it will be held by the builder or in escrow. If you decide not to purchase the home, you will likely forfeit the entirety of your deposit.
How Much is a Builder Deposit?
Typically, a builder deposit is 5% to 10% of the total purchase price of the home. If you’re purchasing a $400,000 home, your builder deposit will be $20,000 to $40,000.
That’s a lot of money. It’s more than you would generally put down as a deposit toward an existing home. But the builder needs to know that you’re committed.
Note that unlike buying a home, it’s fully possible to borrow the builder deposit. The builder isn’t acting as a mortgage lender at this stage; they usually don’t care where the money comes from for the builder deposit.
But that doesn’t mean it’s wise to borrow the builder deposit, as this will change your credit profile and could make it difficult for you to qualify for the mortgage once the home is completed.
Builder Deposits vs. Down Payments
It’s important to understand the difference between a builder deposit and your down payment. The deposit is paid upfront when you sign the contract. The down payment is generally due at closing, once construction on the home is complete.
Your builder may give you the option to pay the entire deposit at signing or to finance it and make payments over time. Regardless, you will need to pay the down payment and closing costs before you can complete your home purchase.
Likewise, it’s important to understand the difference between a builder deposit and earnest money. Both are paid upfront, but earnest money is generally refundable if the deal falls through (assuming there are no contingencies in place that would allow you to back out).
A builder deposit, on the other hand, is typically non-refundable. This is because the builder will likely use this money to cover the costs of materials and labor associated with building your home.
Some builders may offer a grace period in which you can back out of the contract without losing your deposit. But this is generally not the case. If you have a payment plan for the deposit, you may be able to back out of the contract before you have paid the deposit in full.
Sometimes it just makes sense to back out of the contract. Generally, your mortgage loan isn’t finalized until the home is built—you may find that your financial situation has changed.
How Does the Builder Get Paid During Construction?
If you’re financing the construction of your home with a construction loan, the builder will submit invoices to the lender as they complete each phase of construction. The lender will then release funds to the builder so that they can purchase materials and pay their workers.
This process repeats until the home is completed and you are ready to move in. At that point, you will need to get a regular mortgage to pay off the construction loan. Regardless, the down payment toward the mortgage occurs when the closing occurs and your mortgage begins.
What If the Builder Fails to Deliver?
If the builder fails to deliver on their end of the contract, you may be entitled to a refund of your deposit. That being said, “fails to deliver” can mean many things. If the builder simply fails to deliver on time, they may be allowed to mitigate their damages; they may be allowed to resolve the problem by delivering a little later. In fact, construction delays happen fairly often.
Likewise, if the home hasn’t been built to your expectations, that might not be recourse to back out of the contract. You will likely need to give the builder the appropriate time to fix the issues that you have. Most contracts require that you go through mediation and you allow the builder to mitigate.
Building a New Home from a Builder vs. Constructing a Home
Note that this isn’t always how it goes when buying a new construction home. There’s a nuance between a “new construction home” and “constructing a home.”
You need a construction loan if you’re building a property from scratch. But if you just want a new home, you can purchase a newly built home from a builder instead. This is a much faster process, but you will have less control over the finished product.
Importantly, if you purchase a new home already built by a builder, you will have the same costs as purchasing any other existing home.
Getting a Loan Direct from the Builder
It should be noted that pretty much all of this may not be relevant if you’re getting financing from the builder. Larger builders provide their own financing options.
This can be a great way to avoid some of the hassle (and cost) of going through the traditional lending process. Lenders often have some great deals, like not paying a mortgage for the first year in the house, or getting a 0% down payment loan.
But these builders set their own down payments and deposits. You need to work with them to find out exactly what terms they’re offering. Your real estate agent can review the contract and tell you whether it aligns with what they believe is fair.
When you’re buying a new construction home, be prepared to put down a builder deposit upfront and a down payment later.
A deposit is typically due when you sign the purchase contract and is generally non-refundable. Your down payment, however, won’t be due until the project is done and the contracts have been signed.
That being said, your mortgage may begin at the start of the process (a construction-to-permanent loan) or you may actually have two mortgages (a construction loan followed by a permanent loan).
Ask your lender exactly what the financial expectations are. Consider all your options, including builder financing.
Is a down payment due before closing?
No, the down payment is not due before closing. The down payment is due at closing. But if you are taking out a construction loan, your “closing” may occur when the construction begins, rather than when it’s completed.
How much do most builders require as a down payment?
Most builders require a building deposit of 5% to 10% of the total purchase price. Your down payment will vary depending on the mortgage product you’re using. Some builders offer their own financing, which will vary. Be prepared to provide a larger down payment if you’re building a home, generally 20% to 30%.
When you build a new house, when do you start paying a mortgage?
Typically, you won’t start paying the full mortgage until the home is built and you’ve signed the final mortgage contract. But you may need to pay an interest-only mortgage loan throughout the duration of the project.