when is the down payment on a new construction home due

When is the Down Payment for a New Construction Home Due?

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April 25, 2022

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Buying a new construction home is an attractive alternative to purchasing a resale property. First and most obvious – it’ll be new! The home will feel like a blank canvas for you to fill your life with. You also get the benefit of a property designed to be compatible with all the latest amenities.

However, the buying process is slightly different from a conventional mortgage. A common question asked is, “when is the down payment due for a new construction home?” Our guide answers this and more.

Purchasing New Construction Homes: A Quick Guide

There are several types of new construction properties you can buy. Each has a slightly different answer to “when is the down payment due for a new construction home”, so let’s explore your options.

Ready-Built Homes

Perhaps the most common method is to purchase a property that is either recently finished or is in the process of being finished. This is considered an appealing choice because the work is mostly done and the buying process is more similar to obtaining a conventional mortgage.

You make a down payment to the builder and negotiate the purchase as usual; the terms of the loan are also likely to be similar to those of a resale property.

Unbuilt Homes

New construction homes that you purchase “unbuilt” are slightly more complex. Your down payment will typically be larger (20-30% is common) to reflect the increased risk the lender is taking on compared to a ready-built property.

This type of arrangement is more common with smaller builders or a builder who you’ve commissioned to build a home from scratch according to your plans.

If you’re wondering when the down payment for a new construction home of this type will be due, it’s usually made at the start of construction. The loan operates slightly differently from a conventional mortgage.

Combination Loans

Combination loans are a popular alternative to the unusual terms of mortgages for unbuilt homes. They allow the buyer to borrow money to pay for construction but then offer the option to convert this sum to a traditional mortgage once construction is completed.

This is seen as an attractive choice because the down payment might be lower than other mortgage scenarios. This is a big “might”, however – to secure when the down payment is truly due for a new construction home, you’ll have to negotiate with your lender.

When is the Down Payment Due?

The answer to “when is the down payment due for new construction homes” depends on when in the construction process you buy the property. As a general rule:

  • If the property is being built from scratch, you’ll make a down payment during the construction process. The exact time depends on when you can negotiate your financing – some builders might ask for the down payment earlier. Explore your loan options before making a down payment.
  • If the property is already built, you’ll make a down payment when you’re closing on the property. This is the same as with a resold property, except you’re negotiating with the builder rather than the previous owner.

When do Payments Start?

The payments you’ll make if you’re purchasing a new construction home might follow a slightly different structure to when buying a resale property. Here’s how.

Earnest Money for New Construction Homes

Earnest money is a regular part of buying a property. If you’re purchasing a new-built home that has already been completed, you might put down earnest money as usual. However, this is less often the case if the property hasn’t been built yet.

Builder Deposit

A builder deposit is very similar to earnest money, but it’s used for homes that haven’t been built yet. This is money that you pay before the down payment to the builder – it’s often around 5-10% of the full price. However, it can be significantly higher if you’re contracting the builder to provide certain upgrades for your new property.

When is Down Payment Due for New Construction Home?

Earnest money or the builder deposit is put down at the start of the buying process. The down payment comes later – it’s made after negotiating the terms of the mortgage or full repayment cycle.

What if Something Happens During Construction?

Working with builders rather than a traditional lender can feel riskier, especially as you’ll often pay more up-front. Here’s how to handle the risks.

If the Home Cannot be Finished

If the property can’t be finished for reasons outside the builder’s control, both you and the builder need insurance coverage. You can try to negotiate a warranty that covers the construction process as well as the finished property, as this will give you some cover.

If the Terms Change

If the builder starts asking for more money than was initially on the table, you should contact your legal team. Lenders who change the terms of a loan or payment structure halfway through aren’t to be trusted.

If the Home Has Numerous Faults

This can happen with pre-built properties as well as properties that you purchase unbuilt. It’s the builder’s responsibility to ensure that the construction is sound and high-quality. Be careful to read any contracts you sign carefully and have an expert peruse them—you could be inadvertently waiving your right to complain after you move in.

If the Builder Declares Bankruptcy

You should research your builder’s financial history before you start working with them. If there’s any chance that they could go bankrupt during the process, back out immediately. If your contractor goes bankrupt, this could put you in a very difficult place.

How to Protect Yourself When Buying a New Construction Home

  • Do your homework. Know who you’re working with before you start.
  • Make sure you can afford it. Remember that builder deposits are often higher than earnest payments.
  • Read your contracts. Don’t assume you’re being treated in good faith when there’s so much money on the line.
  • Have legal protection and insurance. If things go badly, you’ll need expert assistance. Make sure you’re prepared.

Final Thoughts

As with any other home purchase, it’s important to have your timeline straight. Knowing when your down payment for your newly built home will be due will keep the process running smoothly.Additionally, you’ll want to do your research into how the home is being built. Since no one’s lived in it before you, you’ll be testing the waters. To make sure you’re discussing payments with a reputable builder, and that you have all the information and funds you need to close the deal, contact the team at Associates Home Loan today for guidance and additional loan information that can come in handy.

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