When is Down Payment Due for New Construction Homes?
What can be more exciting than being able to design your new home, select the exterior and interior materials and finishes and then watch your dream home take shape before your eyes? Before starting on this exciting process, it’s a good idea to get educated on the financial aspects of buying a new construction home. In this article, we will discuss when the down payment is due on new construction homes and various scenarios that a new home buyer may encounter.
New Construction Loans – When Do You Need One?
Building a new construction home can be financed in several ways
When buying a production home from a major home builder, such as K. Hovnanian, the builder finances construction, and when the house is completed, the buyer obtains a permanent loan, similar to a loan on a resale home.
When building a custom home or working with a small builder, a new construction loan typically needs to be obtained to finance the cost of construction. A new home construction loan is a short-term loan that covers only the cost of construction. Construction loans are paid out in stages, as major milestones in construction are completed.
Construction loans have more stringent requirements than permanent mortgages since there is no collateral to secure the loan. 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. Once the home is completed, the buyer must obtain a permanent loan (mortgage), which will pay off the construction loan.
Another option is a combination loan or construction-to-permanent loan. With this type of loan, the buyer borrows money to pay for the cost of building the home, and once the house is complete, the loan is converted to a permanent mortgage, typically with a loan term of 15 to 30 years. The benefit of this approach is that there is only one set of closing costs to pay.
Builder Deposit/Earnest Money – How Is It Different from Down Payment?
When buying a new home from a production builder, such as K. Hovnanian, you are purchasing in a community being developed by the home builder on the land he has already purchased. You will normally not need to take out a construction loan as the building process will be financed by the home builder. As with the purchase of a resale home, the down payment is due when you close on your new home. Before your down payment is due, however, you will have to put some money down as the builder deposit, or earnest money.
The builder deposit is the same concept as earnest money you would put down on a resale home, although the amount is typically higher. When a home builder invests in building a new home for you, he assumes greater risks and therefore seeks more protection. Typically, you will be required to pay 5%-10% of the base price as the deposit. When making a cash purchase, that amount will be even higher. If you are selecting options and upgrades for your new home, you will usually be asked to put down 25% to 50% of the upgrades value as the builder deposit. Earnest money is due when you sign a new home purchase contract. Learn more about earnest money by clicking here!
Down Payment on New Home Loan
A new home buyer will typically secure financing while the new home is being built and negotiate the down payment at that time. The amount of down payment will depend on a number of factors, including the buyer’s credit history and credit score, availability of cash, and the type of loan. Homebuyers who qualify for VA or USDA loans can make no down payment, while conventional loans require at least a 3% down payment, with a typical down payment being 20%.
The timing of the down payment is no different for a new home purchase than the down payment on a resale home. The down payment, along with closing costs, is due at closing. The amount paid as the builder deposit is applied towards the down payment and closing costs.
To summarize, the following scenarios are possible when purchasing a new construction home:
- The buyer needs to take out a new construction loan and put down 20%-30% at contract signing. When the house is completed, the buyer takes out a traditional loan, with a down payment dependent on the type of loan
- The builder finances construction, and the buyer puts down 5%-10% plus a portion of options and upgrades value as builder deposit at contract signing. A down payment of 0% – 20%, depending on the type of loan and other considerations, is due at closing. The money paid as builder deposit is applied toward the down payment.
K. Hovnanian builds quality new homes across the U.S., offering a variety of home designs and price ranges. Visit khov.com to find a new home community in your area.