When Do You Start Paying for a New Construction Home: Top Tips

 

When do you start paying for a new construction home? This is often the first question on the minds of families and individuals eager to move into their dream house. Understanding the payment timeline for a new construction home can put you at ease and help you plan financially. Here’s a quick breakdown:

• Builder Deposit: Typically paid upfront before construction begins, around 10% of the total cost.
• Interest-Only Payments: During construction, if you have a construction-only loan.
• Full Mortgage Payments: Begin once the home is completed and you close on your mortgage.

Navigating the nuances of financing a new construction home can feel overwhelming, but it’s manageable with the right knowledge. The importance of understanding the payment milestones cannot be overstated, as it allows for seamless transitions and avoids unexpected financial burdens.

At Prime Homes, Inc., we specialize in turning your unique vision into a reality. I’m Jerome Bertuglia, and with over 30 years of experience in building custom luxury homes, I’ve guided many clients through this process. Our expertise ensures that you’re well-informed about when do you start paying for a new construction home, enabling you to make confident, informed decisions.

Now, let’s delve deeper into the specifics of when do you start paying for a new construction home and what you can expect during each phase of the financing process.

When Do You Start Paying for a New Construction Home?

Understanding when do you start paying for a new construction home can help you plan your finances better and avoid unexpected costs. Let’s break down the timeline into two main phases: during construction and after construction.

During Construction

When building a new home, the first payments you’ll make are typically related to the construction loan. Here’s what you need to know:

• Interest-Only Payments: During the construction phase, you usually only pay interest on the loan. This keeps your payments lower while the home is being built. The bank will disburse funds to the builder as different portions of the home are completed, and you’ll pay interest on the amount disbursed.
• Construction Loan: This is a short-term loan used to cover the cost of building your home. It’s different from a traditional mortgage because it’s designed specifically for new constructions. Construction loans often have higher interest rates due to their short-term nature.
• Living Expenses: If you’re renting or living elsewhere during the construction, you’ll need to budget for those living expenses alongside your interest payments. This can be a significant factor if construction takes several months.

After Construction

Once your home is built, the financial landscape changes. Here’s what happens next:

• Mortgage Conversion: When construction is complete, your construction loan will convert into a permanent mortgage. This process is often referred to as “mortgage conversion.” You’ll now start making regular mortgage payments, which include both principal and interest.
• Principal and Interest Payments: Unlike the interest-only payments during construction, your mortgage payments will cover both the loan principal and the interest. This means your monthly payments will likely increase.
• Occupancy Permit: Before you can move in and start making mortgage payments, your new home must receive an occupancy permit from your local building authority. This permit confirms that the home is safe and meets all building codes.

By understanding these phases, you can better plan for when do you start paying for a new construction home and manage your finances effectively. Next, we’ll explore the various types of financing available for new construction homes.

Types of Financing for New Construction Homes

When building your dream home, securing the right financing is essential. There are several options available, each with its own set of requirements and timelines. Let’s break down the most common types: builder financing, construction-only loans, and combination loans.

Builder Financing

Builder financing is often used for production homes in new developments. Here’s how it typically works:

1. Builder Deposit: To start construction, you’ll need to pay a builder deposit, usually around 10% of the total construction costs. This deposit acts as a commitment to the builder and helps cover initial expenses.
2. Customization Costs: If you opt for custom upgrades or changes, you may need to pay for these out-of-pocket before construction begins. These costs are separate from your builder deposit.
3. Mortgage Setup: Once construction is complete, you’ll need to secure a mortgage to pay off the builder and buy the lot. This process is similar to buying an already-built home, and you’ll need to make a down payment at this stage.

Construction-Only Loan

A construction-only loan is a short-term loan used to cover the cost of building your home. Here’s what you need to know:

1. Short-Term Loan: This loan is typically for one year or less and is used solely for construction costs. Once the home is finished, you’ll need to pay off the loan or refinance it into a permanent mortgage.
2. Higher Interest Rate: Construction-only loans often come with higher interest rates due to their short-term nature and the risk involved.
3. Refinancing: When construction is complete, you’ll need to secure a permanent mortgage to pay off the construction loan. This means you’ll go through two application processes and two closings, which can be more expensive.

Combination Loans

Combination loans, also known as construction-to-permanent loans, simplify the financing process by combining the construction loan and mortgage into one. Here’s how they work:

1. One-Time Close: With a combination loan, you only need to go through one application process and closing. This saves time and reduces closing costs.
2. Interest-Only Payments: During the construction phase, you’ll make interest-only payments on the loan. This can help manage your finances while you’re still paying for other living expenses.
3. Permanent Mortgage: Once construction is complete, the loan automatically converts into a permanent mortgage. You’ll start making regular principal and interest payments, just like any other mortgage.

By understanding these financing options, you can choose the best one for your situation and ensure a smooth construction process. Next, we’ll discuss the timing and details of down payments and builder deposits.

Down Payments and Builder Deposits

Down Payment Timing

When buying a new construction home, understanding the timing of your down payment is crucial. The down payment is typically due at the closing of the home. This means you don’t need to pay it until the house is fully built and ready for you to move in.

However, if you’re using a construction loan, the down payment might be required upfront when you apply for the loan. This is because construction loans are riskier for lenders. They often require a higher down payment, sometimes as much as 20-30%.

Here’s a quick breakdown:

• Before Construction: If you’re using a construction loan, expect to make a down payment when you apply for the loan.
• At Closing: For traditional mortgages, the down payment is due at closing, after the home is completed.

Builder Deposit

A builder deposit is similar to earnest money but is specific to new construction homes. This deposit is usually paid before the down payment and can range from 5-10% of the total home price.

The builder deposit serves several purposes:

1. Secures Your Spot: It shows the builder you’re serious about buying the home.
2. Helps with Initial Costs: The builder uses this money to cover some of the initial costs of construction.

Custom Upgrades and Change Orders

If you want custom upgrades, like a gourmet kitchen or a luxurious bathroom, the builder deposit might be higher. These upgrades add to the construction costs, and the builder needs to cover these expenses.

Change orders are another factor. If you decide to make changes to the home design after construction has started, this can increase the builder deposit or require additional payments.

Negotiation

Don’t forget that many aspects of the builder deposit and down payment can be negotiated. Here are some tips:

• Ask for Flexibility: Some builders may offer flexible payment plans or lower deposit requirements.
• Review the Contract: Make sure to read the contract carefully. Look for any clauses that might allow for changes in the deposit amount.
• Consult Your Legal Team: Always have a legal expert review the contract before you sign. This ensures you’re protected and understand all terms.

By understanding the timing and purpose of down payments and builder deposits, you can better plan your finances and avoid surprises. Next, we’ll discuss how to protect yourself during the construction process.

Protecting Yourself During the Construction Process

Building your dream home is exciting, but it’s crucial to protect yourself throughout the construction process. Here’s how to ensure you’re covered:

Insurance Coverage

Construction Insurance: This is essential. It covers property damage during construction. Make sure you or your builder have it. It typically includes coverage for theft, fire, and vandalism.

Builder’s Risk Insurance: This specific type of insurance is crucial. It protects against risks like weather damage, theft, and accidents. Check if your builder has it or consider getting it yourself.

Warranty: Always negotiate a warranty that covers both the construction process and the finished home. This ensures you’re protected if anything goes wrong during or after the build.

Legal Protection

Contract Review: Have a legal expert review your contract before you sign. This ensures you understand all terms and are protected against unfair clauses.

Negotiation: Don’t be afraid to negotiate terms. Ensure the contract includes clear timelines, costs, and what happens if the builder doesn’t meet their obligations.

Legal Team: Keep a legal team on standby. They can help if the builder changes terms or if there are disputes. They can also assist in risk management by ensuring all legal requirements are met.

Builder Bankruptcy

Financial History: Research your builder’s financial history. Look for any signs of financial instability. If they have a history of bankruptcy or financial issues, consider looking for another builder.

Backup Plans: Have a backup plan in case your builder goes bankrupt. This could include having another builder ready to take over or financial reserves to cover additional costs.

Risk Assessment: Regularly assess risks throughout the construction process. Ensure you have insurance and legal protections in place to handle any unexpected issues.

By taking these steps, you can protect yourself and your investment during the construction of your new home. Next, we’ll answer some frequently asked questions about new construction home payments.

Frequently Asked Questions about New Construction Home Payments

Do you pay before or after a house is built?

It depends on the stage of construction and the type of loan you have. Generally, if you are financing a new construction home, you will make payments at different stages:

• During Construction: If you have a construction loan, you typically make interest-only payments during the building phase. This means you pay only the interest on the amount borrowed so far, not the principal. This helps keep your payments lower while the home is being built.
• After Construction: Once the house is complete and you have a Certificate of Occupancy, your loan converts to a traditional mortgage. At this point, you start making full mortgage payments, which include both principal and interest.

For example, if you close on your new home on April 11th, you’ll pay interest from that date until the end of the month. Your first full mortgage payment would then be due in June.

How much do most builders require as a down payment?

The down payment for new construction homes can vary based on several factors:

• Ready-Built Homes: For homes that are already built or nearly complete, the down payment is often similar to that of a resale property. This can range from 3% to 20%, depending on your loan type and lender requirements.
• Unbuilt Homes: If you’re purchasing a home that hasn’t been built yet, the down payment is typically higher, ranging from 20% to 30%. This reflects the increased risk for the lender, as the home is not yet complete.

Builder Deposits: In addition to the down payment, builders may require an upfront deposit, often called earnest money. This can be a percentage of the total construction cost and is usually paid when you sign the contract. This deposit shows your commitment to the purchase and helps cover initial costs.

When do you start paying a mortgage on a new build?

You start paying your mortgage after the construction is complete and you have closed on the home. Here’s a simplified timeline:

1. Construction Phase: During this period, you may make interest-only payments if you have a construction loan. These payments cover the interest on the amount disbursed to the builder as construction progresses.
2. Closing: Once the home is finished and you receive a Certificate of Occupancy, you close on the mortgage. This is when the construction loan converts to a traditional mortgage.
3. First Mortgage Payment: Typically, you don’t make a full mortgage payment immediately after closing. For example, if you close in April, your first full payment would be due in June. This gives you a brief period to settle into your new home without the immediate financial burden.

By understanding these timelines and requirements, you can better plan your finances and ensure a smooth transition into your new construction home.

Next, we’ll explore the types of financing available for new construction homes.

Conclusion

Building your dream home is an exciting journey, but understanding when do you start paying for a new construction home is crucial for smooth financial planning. The payment timeline varies based on the financing option you choose and the construction phase.

Prime Homes, Inc. offers a range of services to help you navigate this complex process. From builder financing to construction-only loans, we ensure transparency and support at every step.

Key Takeaways:
– During Construction: You may only need to make interest-only payments if you have a construction loan.
– After Construction: Your mortgage payments start after you close on the home and receive the occupancy permit.
– Down Payments and Builder Deposits: These are typically due at different stages, so plan accordingly.

Always do your homework, read contracts carefully, and consult legal and financial experts to protect your investment.

For more detailed guidance and to explore our new construction services, visit Prime Homes, Inc.

Building a home is a big step, but with the right knowledge and support, it can be a rewarding experience. We’re here to help you every step of the way.