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?
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
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.