Financing a new construction home may not be all that different from financing the purchase of an existing home. You’ll have access to the same loan types, and the down payment process is the same. However, you may need other types of financing in addition to your traditional mortgage, meaning you may be on the hook for more than one down payment.
For most people, a house is the most expensive purchase they’ll make in their lives. Finding your dream home is an exciting time, but it can also be stressful, thanks to the many moving parts.
Buying a home requires plenty of new expenses, from the down payment to the closing costs to your new mortgage payments. And buying a new construction home can only further complicate things, especially if you need additional financing or have to pay a deposit to the home builder.
Before you decide to buy a home construction home, it’s important to understand what you’re getting yourself into. Keep reading to learn more about the different types of financing needed for new construction homes, when the down payment is due, and more.
When is the down payment on a new construction home due?
The down payment for a new construction home is due at the time of closing, just like any other loan. However, you may have an additional down payment due if you’re using a construction loan, as well as a deposit for the builder when you sign the contract.
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What is a new construction home?
A new construction home is one where you’re the first to live in it after it’s built. In some cases, you might work directly with the builder to customize and build your home. When you go this route, you have a hands-on role in the building process, helping to approve the layout, choose custom features for the house, and more.
In other cases, you may simply buy a new construction home after it’s already been built. In this case, you wouldn’t have any say in the features of the home, but you would still be the first to live in it.
When it comes to a new construction home, there are generally three options:
- Built on spec: A spec home usually doesn’t allow for much customization on your part as the buyer. The floor plan and house features are already decided, and you’re buying it as-is.
- Semi-custom: With a semi-custom home, the structure is already set, but you’ll have the ability to customize some of the interior features. With a semi-custom, often the builders provide multiple options for the flooring, cabinetry, countertops, and other similar characteristics.
- Custom: With a custom home, you as the buyer have a hands-on role in the entire process. You may be hiring individual contractors and subcontractors, helping to design the blueprint, and making all the other important decisions about the house.
When is the down payment due for new construction homes?
The timing of the down payment for a new construction home is the same as any other home purchase. You’ll bring the down payment to the closing table, along with closing costs and anything else you’re required to provide.
However, when you’re buying a new construction home, the mortgage down payment may not be the only one you’ll pay. First, if you’re using a construction loan during the building process, you’ll have to provide a down payment when you close on that loan. Down payments on construction loans are generally larger than traditional mortgages, and you may be required to put down 20-30% of the mortgage amount.
Depending on whether you’re buying a house on spec or building a custom home, you may also be required to pay a down payment or deposit to the builder. This builder deposit is usually required at the time of the contract signing. In other cases, it may be due in two installments )or more) during the build process. The good news is that the deposit you make to the builder can count toward your future down payment on the home.
New construction loans — when do you need one?
As we mentioned, buying a new construction home can take different forms, from buying a move-in-ready home to building a fully customized home. The type of new construction home you buy will affect the type of financing required. If you’re new to the process or aren’t sure where to start, a real estate agent may be able to provide some guidance on what type of financing you’ll need.
Some builders don’t require you to obtain any special financing to build your home. Instead, the builder pays for the project, and then you’ll simply get a traditional mortgage, which you’ll close on when the build is complete. With this type of financing, you may still need to make a deposit with the builder when they break ground on the home. However, if the house is already built when you buy it, then a deposit may not be required.
New home construction loans
If you’re building a custom home, then you’ll probably need a new construction loan to finance the project. Construction loans are a type of short-term financing you get through a lender. It’s used to finance the building process. Because home construction loans aren’t secured like traditional mortgages, they may have higher interest rates and require higher down payments. When the house is complete, you’ll get a traditional mortgage, which is used to pay off the construction loan.
It’s important — regardless of what financing method you choose — to compare multiple lenders before you make a decision. A study by the Federal Reserve found that getting just one extra quote saved homebuyers $1,500 over the life of the loan. Asking for five or more quotes, saved buyers an average of $3,000.
Some mortgage lenders offer construction-to-permanent loans, also known as combination loans. Rather than having two separate loans and two separate closings, just one loan is required. When the home is completed, the construction loan is automatically converted to permanent financing. The benefit of these loans is that there’s only one loan approval process, one closing, and one set of closing costs.
Builder deposit (aka earnest money) vs. down payment
Builders usually require a deposit ranging between 5% and 10% of the total sales price
As we mentioned, most builders require you to put down a deposit, also known as earnest money, when you work with them on your new construction home. This deposit is similar to the earnest money you might put down when you make an offer on a resale home. Depending on the home builder, the deposit may range from 5-10% of the total build price.
The deposit is a show of good faith, and if you back out of the deal, you may lose your deposit. However, assuming you go through with the deal, your deposit will count toward your final down payment.
There are a couple of key differences between your deposit (or earnest money) and your down payment. First, your deposit is paid to the builder, while the down payment is paid to your mortgage lender (though it ultimately goes to the seller).
The purpose of the deposit is to reserve your home and provide some capital to the builder. The down payment, however, goes toward the home purchase price and represents your equity in. For example, if you build a $300,000 home and your down payment is $30,000, you’ll have 10% equity in the home, while the bank owns the other 90%.
How much down payment do you need on a new home loan?
The size of the down payments required for brand new home loans are no different than if you were purchasing a resale home, and it largely comes down to the type of loan you’re borrowing.
If you’re using a conventional mortgage, you’ll need a minimum down payment of 3% (though some lenders may prefer 5%). Keep in mind that if your down payment is less than 20%, you’ll have to pay private mortgage insurance (PMI) until you acquire enough equity in your home.
Your down payment may look a bit different for other loan options, such as a government-backed loan. For example, an FHA loan requires a down payment of at least 3.5%, but lenders could require as much as 10%, depending on your credit score. Other government-backed loans like VA loans and USDA loans generally don’t require a down payment at all.
Finally, if you’re using a construction loan for your home build, you may have to pay a separate down payment (unless you’re using a construction-to-permanent loan). Construction loans often require a larger down payment, usually between 20% and 30%.
Is the down payment due on the closing date?
Yes, just like a traditional mortgage, the down payment for a new construction home is due on the closing date. If you’re using a construction loan, you will also pay a down payment when you close on that loan.
Is it harder to get a mortgage on a new build?
The requirements to qualify for a mortgage for a new build aren’t any different from the requirements when buying any other home. However, if you need to obtain a construction loan, you may face additional roadblocks, since those loans aren’t secured by any property. They generally have higher interest rates and higher down payment requirements, and may also require a higher credit score.
How long does a down payment have to be in your account?
Some lenders require what’s known as down payment seasoning, meaning you’ve maintained the money for the down payment in your account for a certain period of time. Lenders generally want the money in your possession for at least 60 days before closing.
Who gets the down payment on a new construction home?
The down payment on a home technically goes to the seller, and represents your contribution to the home price. For example, if you’re putting 10% down on a $300,000 home, then you would be paying $30,000 of the sale price, while the lender paid the other $270,000 with the loan amount. It’s the part of the purchase price that isn’t financed through the mortgage.
- A new construction home is one that you’re the first to live in, either because you bought it new from a builder or because you participated in the build process.
- New construction homes may require special financing, including construction loans or construction-to-permanent loans. The right real estate agent can help you find the best type of loan for your situation.
- Construction loans usually require a higher down payment — often between 20% and 30% — and may have higher interest rates than conventional loans.
- The down payment for each loan is due at the time of closing. If you’re using both a construction and permanent mortgage, you may have multiple down payments.
- In addition to the down payment required by the lender, you may also have to pay a builder deposit or earnest money when you sign the contract.
Financing a new construction home
If you’re buying a new construction home, it’s important to understand how construction financing works. Depending on the deal, you might have just a traditional mortgage, a construction loan, a traditional loan, or a combination mortgage that transitions from a construction loan to a permanent mortgage when the home is completed. In all cases, you are likely to owe a down payment, which will be due at the time of closing.
Make sure you compare at least three lenders when shopping for a mortgage. The list of lenders below is a good place to start.
View Article Sources
- Mortgage Industry Study – SuperMoney
- Housing Loans – GovLoans.Gov
- Why Are Consumers Leaving Money On The Table? – Federal Reserve
How soon after making an offer Do you need a down payment? ›
Buying a home usually occurs in stages. You'll first provide an earnest money check to the escrow company, usually within three days of making an offer. On closing day, you'll pay the down payment and closing costs and sign final loan documents.How much do most builders require as a down payment? ›
The down payment required on new home construction loans is typically 20-30% and they usually carry a higher interest rate. The buyer will pay only the interest on a construction loan, at a variable rate, while the home is being built.How do you calculate down payment on a construction loan? ›
So, for instance, if the home is appraised to be worth $500,000, they will loan you $500,000 x (95% as an example) = $475,000. The down payment will be your construction costs less the loan amount. So, if the construction is quoted to cost $500,000, your down payment will be $500,000 - $475,000 = $25,000.How much earnest money do you get for new construction? ›
When purchasing new construction, your earnest money deposit is usually 5% of the sales price. The builder typically mandates the amount as a part of their contract (see more on builder contracts below).Does a higher down payment make your offer stronger? ›
A higher down payment shows the seller you are motivated—you will cover the closing costs without asking the seller for assistance and are less likely to haggle. You are a more competitive buyer because it shows the seller you are more reliable.How much time can you ask for before accepting an offer? ›
But one week is generally considered acceptable, and if you feel you need to offer an explanation, you can say you need to “talk it through with your partner” or “run the numbers.”Should I pay a contractor 50% up front? ›
As the homeowner who is commissioning the project, it's reasonable to withhold at least 10% as your final payment. Avoid paying in full upfront, and definitely avoid paying anything before the contractor has evaluated the project in person.Do you have to pay full asking price on a new build? ›
Just because a new-build property is new, it doesn't mean the asking price is non-negotiable. You can make an offer in the same way you would if you were buying an older property. Of course, it's up to the developer if they wish to accept a lower offer or politely decline it.Should you tell a contractor your budget? ›
If you have ever asked yourself if you should provide your contractor with a remodel budget, the answer is YES. Remodeling contractors ask you for your budget for several reasons, all of which are meant to help you.What is the credit score for a construction loan? ›
Additionally, don't make any large purchases in the months before you're going to apply for a construction loan. Most lenders typically want a minimal credit score of 680 for the loan to be considered, some want the score to be 720 or better.
How many stages are in a construction loan? ›
Construction loan payments
There are usually five stages of payment, which are made at key points in the process – beginning with the 'slab' or floor, the roof and frame, the lock up stage, the fit out and finally the completion phase.
Construction loans usually have variable rates that move up and down with the prime rate. Construction loan rates are typically higher than traditional mortgage loan rates.Do you need a bigger deposit for a new build? ›
Lenders often ask for a higher deposit up-front
You might find that you need to save a larger deposit in order to secure a mortgage on a new build property. The reason for this is that a lender tends to set a lower maximum loan to value (LTV) ratio on new build mortgages.
Aim to push it down as much as possible, and don't agree to more than 25%. Always get a receipt for a deposit, as well as receipts for any materials it covers.Are new build deposits refundable? ›
Your deposit is non-refundable, unless the contract between you and the seller is breached. This is why it is important to have a contract in place, clearly stating what the terms are and what happens if either party pulls out.Can you negotiate a down payment? ›
A lower down payment means longer mortgage debt.
You can effectively reduce your down payment by negotiating on the purchase price of the home itself. Remember that most homes have a number of closing costs associated with them, which may include: Escrow fees, paid to an attorney in exchange for facilitating a close.
In general, your pre-approval amount is based on your debt-to-income ratio, your down payment amount, and your FICO score. Let's get into it!Should you immediately accept an offer? ›
Don't feel pressured to accept a job offer immediately over the phone, or to negotiate salary and benefits straight away. In most circumstances, it's advisable to thank the employer for their offer, and ask for it to be confirmed in writing.Is it OK to tell interviewer about other offers? ›
It is completely reasonable to let a hiring manager know that you've got offers on the table at other company you're genuinely interested in working at, particularly if the interview process has slowed down or stalled for whatever reason.What are the four requirements to accept an offer? ›
Rules of Acceptance
There must be communication of acceptance from the offeree's side. You can withdraw an offer any time before it's accepted. Only the person to whom the offer is made can accept it. You are not bound by an acceptance made by someone else on behalf of the offeree without his authorization.
Why do contractors ask for cash? ›
To avoid payroll taxes; To help the contractor evade its income tax obligations; and/or, To falsely report your company's expenses in order to reduce its taxable income.Do contractors ask for money upfront? ›
Providing deposits for contractors is a crucial—and normal—step in starting a renovation. Short answer: Yes. But there are exceptions, and your contractor may have some flexibility. Below, Sweeten outlines the reasons behind upfront payment amounts, and some options for negotiating your deposit for a contractor.Are new build homes prices negotiable? ›
Yes, you can negotiate on new construction homes - you're far better off negotiating for 'things' than for money off the purchase price. Even negotiating closing costs is easier than negotiating the purchase price because builders want the final price as high as possible for future appraisals in the neighborhood.How much does it cost to reserve a new build? ›
This fee can range anywhere from £500 to £2,000. The fee will be deducted from the balance due when the sale completes, but it is non-refundable if you don't complete the purchase in the timescale required by the developer.
Cost: You can often save money
One of the biggest advantages of buying a home off plan is that the price can be set a year or two before completion. This means your new home could end up being worth more when you move in than it was when you bought it.
The short answer is – you can definitely try! Many builders expect some kind of negotiation on price and often there is a small contingency planned into their quotes although this isn't always the case. What is this? You don't want to push the price too much though.What is a good credit score to build a house? ›
Construction Loan Requirements
To win approval for a construction loan, you may need: Good to excellent credit. To reduce their risk, lenders require borrowers to have a credit score of 680 or higher to qualify for a construction loan. That's just the minimum, as some lenders may require a score of 720 or better.
It's harder to get approved for a construction loan than for a typical purchase mortgage, Moralez and Thomas say. That's because the bank is taking extra risk during the building phase, since there isn't an asset to secure the mortgage. Typical down payments are around 20%.What credit score is needed to build a new home? ›
Backed by the Federal Housing Administration, FHA construction loans have a minimum 500 credit score requirement with a 10% down payment — meaning you could build your dream home, even with less-than-perfect credit.How long does it take to build a house after the foundation is poured? ›
Depending on square footage, weather conditions, and the availability of workers and supplies, the construction of a new home can take anywhere from three months to over a year.
How long after framing is a house done? ›
The type of home you are building may mean a week or 2 longer. Upon completion of framing, you can expect to be in month 5 of your building, but again, that's if all is going according to your original plan.How is loan given on under construction property? ›
When a Home Loan is taken on an under-construction property, the entire loan amount is not disbursed to the builder at once. Instead, the disbursal happens in parts on the basis of the completion of the stages of construction by the builder.Is a construction loan a take out loan? ›
A construction loan typically lasts 12 to 18 months. It's meant to be interim financing, not a permanent loan or mortgage. The takeout loan, on the other hand, acts as a permanent mortgage. It's a type of financing that's designed to meet your capital needs for five to 10 years.Why do construction loans have higher interest rates? ›
The builder or home buyer takes out a construction loan to cover the costs of the project before obtaining long-term funding. Because they are considered relatively risky, construction loans usually have higher interest rates than traditional mortgage loans.How much less should you offer on a new build? ›
Latest analysis shows that buyers of new build homes are currently negotiating a typical discount of around 14% from the asking price.How does a deposit work on a new build? ›
For new homes, the deposit is usually payable directly to the builder, and held “in trust” by the builder's lawyer. Builders who are selling “pre-construction” homes may also require higher deposits than normally paid for re-sale properties. This allows the builder to use the money toward ongoing construction costs.Why do banks not like new builds? ›
This is because most lenders believe new home buyers are paying a premium prices for new homes and the home will lose value the moment you move in. It can be very difficult to re sell a new home (at the fair market price) whilst the house builder's sales staff is still on the development.At what stages should I pay my builder? ›
For small projects payments for building work can be based on a payment schedule. These often follow milestones such as 20% foundations, 30% walls, 20% roof, 20% services, 10% completion.When should you pay a builder a deposit? ›
Paying a deposit to a builder
Builders sometimes ask for a deposit to pay for the materials to start the agreed job. If this happens after you agreed the contract: ask to see the invoice from the builder's supplier. pay the amount invoiced and insist on a receipt.
Typically a contractor would ask for 50% upfront to cover the initial get go of a project. Like stated above materials and wage costs. My advice to you would be to ensure everything is typed in a contract that both you and the contractor have signed.
What happens after you reserve a new build? ›
Once you've reserved your home, you'll need to secure your mortgage. If you already have a mortgage-in-principle (and you're happy to proceed with the same lender) go back to the lender to secure a formal mortgage offer. You'll need to have your mortgage application accepted before you can proceed to the next step.Can you pull out of buying a new build? ›
Your contract with a developer is still a contract, and you'll find it hard to back out without being in breach and being hit financially. If you choose to back out now, you are very likely to lose your 10% deposit.Can I get my reservation fee back on a new build? ›
Often the reservation fee is stated to be non-refundable if the buyer fails to exchange contracts within the time period specified. Whether you are entitled to the return of your fee will depend on the terms of your reservation agreement.What's the next step after making an offer on a house? ›
After your offer is accepted and you go under contract, you'll need to complete your mortgage application, have a professional home inspection done, pay for an appraisal required by the lender, have a title search conducted, and review and sign numerous legal documents before you can assume ownership of the property.Do you have to be approved for a loan before making an offer? ›
Submitting a mortgage preapproval letter along with your bid on a home can give you an edge over rival buyers, but you don't have to have a preapproval to make a purchase offer.Do you need to have a mortgage before making an offer? ›
A mortgage in principle is not technically legally required for an offer on a property to be valid. However, the seller will generally not take the offer seriously if you do not have proof that you will be able to borrow the required funds to pay for the property.Can you pull out after making an offer on a house? ›
The simple answer to the question is that you can withdraw or reject an offer on a property at any time up to the exchange of contracts. After exchange of contracts you will have entered into a legally binding contract and you will be subject to the terms of that contract.What happens once my offer is accepted? ›
Once your offer has been accepted you will need to fill in a mortgage application form and provide your lender with the necessary documentation. The documentation they will require includes: Proof of ID. Proof of address.How long after viewing a house do you put an offer in? ›
Around four days is spent waiting for viewings, with buyers on average taking a further four and a half days to put an offer on a home after its first inspection. On average, buyers view their future home three times before making an offer, and take three friends or family members with them to help make the decision.Why would a seller not accept an offer? ›
If your home purchase offer was rejected, it was likely for a reason involving money. Your offer price may have been too low or too high, or they may have simply received a better offer. Other reasons could include the listing agreement commission structure, specific contract requirements, or personal reasons.
What is typically not negotiable in the contract? ›
Non-negotiable means that the price of a security or terms of a contract cannot be modified. Non-negotiable can also refer to a security that cannot easily be transferred from one party to another.Do pre-approvals hurt your credit? ›
Inquiries for pre-approved offers do not affect your credit score unless you follow through and apply for the credit. If you read the fine print on the offer, you'll find it's not really "pre-approved." Anyone who receives an offer still must fill out an application before being granted credit.What's better pre qualified vs pre-approved? ›
The biggest difference between the two is that getting pre-qualified is typically a faster and less detailed process, while pre-approvals are more comprehensive and take longer. Getting a pre-qualification or pre-approval letter is generally not a guarantee that you will secure a loan from the lender.How long is a preapproval letter good for? ›
The lender will then use these documents to determine exactly how much you can be preapproved to borrow. Once you're preapproved, you'll have 90 days to find a home you love.How much over asking price should I offer on a home 2022? ›
On particularly competitive homes, an offer could come in far above the 1-3% threshold. But as a buyer, there's no golden rule for “how much is too much.” It comes down to what you can afford, what your lender will finance, and how much cash you have in the bank.What is a strong offer on a house? ›
If you're ready to buy a home, you're probably wondering about how to write “a strong offer.” When we say “strong offer,” we're talking about writing the best offer – an offer that's going to have the best chance of getting chosen by the seller.Can mortgage be declined after mortgage offer? ›
But it doesn't guarantee you a mortgage, and it is possible to be refused by a mortgage provider after they've given you an agreement in principle. If this happens, it's often because the lender found something that didn't meet their criteria when they did a full search of your information.