Deciding to build your own home or buy a new construction home is an exciting opportunity. You are able to customize the layout, design, and feel to make it your perfect home. But before you begin dreaming of that huge kitchen, you will need to ensure that your finances are in order.
Unlike an existing home, where you have a traditional mortgage with a down payment due at closing, new construction homes rely on different types of financing to get the building started, including construction loans. If you are unfamiliar with construction loans or new construction home financing, you may have questions, like when is the down payment due for a new construction home and when you start paying on the home itself.
What is a New Construction Home?
A new construction home is where you are the first person to live in it; there are no previous owners or tenants before you. This could mean land that you have purchased to build a new home on, complete with hired contractors and designers. It could also be a house that is designed and built by a home builder that you have agreed to work with.
Many people may choose a new construction home over an existing one to ensure that the house is built to their specifications or if they simply prefer a brand new home with no known problems.
New construction homes are separated into three categories based on how they are built and customized:
Fully custom home
A fully customized home is a home that is built to match your specifications and design. The customization applies not only to the house’s layout but everything from the appliances and type of heating to wall color and ceiling fans.
Custom homes require a team of contractors and builders to build the house on a lot you own, either outright or through a land loan. When financing a custom home, you will want to apply for a construction loan, which gives you the funds for building.
Semi-custom home
Unlike a fully custom home, you will work with a building company to create your home if you choose a semi-custom home. You will have choices with some items, including adjustments to the layout and exterior features. However, it won’t be fully customizable, and you may have to settle on some features that the builder offers.
Semi-custom homes are a great option for those that want a new construction home without the hassle of completely starting from scratch but still want to have their home feel unique to others. They also tend to be easier to build and will have a concrete timeline that allows you to plan accordingly.
Production home
Production homes are gaining popularity in the housing market. Developers will buy large tracts of land and create new housing communities. If you snag a home in the early stages, you can customize small features such as cabinet materials, countertops, and fixtures. While they are not fully custom homes, they are still considered new construction homes.
Spec home
The final type of new construction home is a home that has been newly built and is ready to move into, but an individual has not customized it. These are often built to fill in spaces in new communities or built on single lots in established communities. New construction homes are enticing to buyers who want new materials and appliances without having to think about every detail.
New Construction Home Financing
When building a new construction home, you will have different financing options available to you depending on the type of home you are building. For example, if you are choosing a semi-custom home or a spec home, you are more likely to be able to use builder financing. Depending on the builder, a custom home may require a new home construction loan. Eventually, all new construction homes will become a traditional mortgage once building has been completed.
Builder financing
Many builders, depending on the project, do not require special financing for you to purchase your home. Instead, you can use their builder financing option. This is a traditional mortgage, such as FHA or VA loans, which will close when the building is completed.
However, using builder financing means that you will be borrowing from the home builder’s lender through their own mortgage subsidiary or their relationship with a mortgage company. Builder financing is helpful for those who want to complete their home faster, as it bypasses the need to search for a construction loan through another financial institution. The only downside is that it might come with higher rates and closing costs; you are not able to research different companies for competing rates.
If your house is already built but is still a new construction home, you may not need a deposit with these types of loans. However, if the builder is breaking ground, you may need to put down a deposit at the start of the building with the builder’s financing. This deposit is non-refundable if you walk away from the house and will be applied to your down payment when you decide on the home.
New home construction loans
If you have chosen to build a custom home from scratch, you will need to get a construction loan to fund the building.
Construction loans are short-term financing that covers only the cost of building the home. Their terms are typically less than a year in length but may vary by the size of the project and the lender. They also tend to have higher interest rates compared to a mortgage.
Once the house has been built, you will receive a certificate of occupancy, which allows you to end your construction loan and begin your mortgage, paying off the remaining construction loan.
Construction-to-permanent loans
Also known as combination loans, construction-to-permanent loans allow you to convert your construction loan automatically into a traditional mortgage loan once the home has been completed. Essentially, you will only have to worry about having one loan with a new construction home instead of two, as with new home construction loans.
By using a combination loan, you will also only need one approval for the loan, one closing, and one set of closing costs.
What is a Builder’s Deposit?
Some builders may require you to pay a deposit before beginning to build, especially if they are building on a new lot or individual lot instead of a tract of land owned by a company. The deposit is often referred to as a builder’s deposit or earnest money, and it’s similar to the earnest money you put down on a resale offer. It represents a sign of good faith that you will continue with the building of the house. If you do back out, you will lose that deposit.
A Builder’s deposits can range from five to ten percent of the total build price, depending on the home builder and the construction of the home. The deposit goes to the builders directly and helps with construction loans and buying the lot.
Unlike a builder’s deposit, a down payment is for the home purchase, not the building company, and goes to the mortgage lender and seller. It represents your equity in the home, while the builder’s deposit is a reservation for the building of the home.
Down Payments on a New Construction Home
One of the most important parts about financing your new construction home, and often the most expensive part, is the down payment. The down payment is a percentage of the home price that is paid upfront when buying a house. Down payments are required for new and existing construction homes and can come with a host of questions.
The biggest question that many people have about down payments is when the down payment is due for a new construction home. As with existing homes, down payments for new construction homes are typically due at the closing. However, when the closing occurs may depend on the type of loan you have with the lender.
When is the down payment due on a new construction home?
The down payment on a new construction home is due on the closing date and the rest of the closing costs, just as with other traditional mortgages. The closing date for a home is traditionally set for 30 to 45 days after the completion of your home.
However, if you are using a construction loan and a traditional mortgage loan, the construction loan will usually have its own down payment requirement. The down payment for a construction loan is due when you apply for the loan rather than at the close of it. This may be part of the builder’s deposit or earnest money, be called that instead of a down payment, or it could be its own separate fee.
How much of a down payment do you need on a new construction home?
Down payments, similar to builder’s deposits, are a percentage of the total cost of the home. The percentage amount will vary by lender and loan type and can have a large range. For example, if you have a conventional mortgage, lenders require at least 3% of the loan amount as a down payment, although many now require 5%. However, if you’ve had financial trouble in the past, your lender may require a larger down payment to ensure you have enough cash flow to afford the house.
If you are using a construction loan, the down payment or earnest money will be a higher percentage, typically at least 20%, but it can be as high as 30%. The down payment is higher on construction loans because there is more risk involved in building a brand new home rather than simply purchasing a mortgage on a new home. The down payment is also often rolled into the builder’s deposit on a construction loan, which, as mentioned before, goes to helping the builders with their initial costs.
As with traditional mortgages, if you have less than 20% for your down payment for a new construction house, you will have to pay extra for private mortgage insurance until the home on your equity has increased.
How long does a down payment need to be in your bank account?
Before applying for any type of mortgage loan, whether a construction loan or an FHA, make sure that your down payment has been in your account for at least 60 days. More and more banks require down payments to be seasoned money or money that has been in your bank account for a specific period of time. This is to make sure you have enough consistent income and that the down payment isn’t a loan from another lender.
Buying a New Construction Home
The prospect of buying a new construction home can be an exciting one. Depending on the home style, you can often customize everything to fit your needs, or you can move right into a brand-new home that no one has lived in.
As with any large financial purchase, keeping your timeline straight is important. Knowing when your down payment on your new construction home is due to when that final beam has been put in will keep everything running smoothly and stress-free.
If you are interested in learning more about new construction homes, contact one of SouthEast Bank’s knowledgeable lenders about our construction loans.
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