When is the down payment due for new construction homes?
What could be more exciting than being able to design your new home, select exterior and interior materials and finishes, and then watch your dream home take shape before your very eyes? Before starting this exciting process, it is a good idea to educate yourself about the financial aspects of buying a new construction home. In this article, we’ll discuss when the down payment is due on new homes and the various scenarios that a new home buyer may encounter.
New Construction Loans – When Do You Need Them?
There are a number of ways that building a new home can be financed
When buying a production house from a large homebuilder, like K. Hovnanian, the builder finances the construction, and when the house is completed, the buyer gets a permanent loan, similar to a loan on a resale house. .
When you are building a custom house or working with a small builder, a new construction loan usually needs to be obtained to finance the cost of construction. A new home construction loan is a short-term loan that only covers the cost of construction. Construction loans are paid in stages as the major construction stages 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 usually 20-30% and they usually carry a higher interest rate. The buyer will only pay interest on a variable rate construction loan while the home is being built. Once the house is completed, the buyer must obtain a permanent loan (mortgage), which will pay off the construction loan.
Another option is a combined loan or a construction loan to permanent. With this type of loan, the buyer borrows money to pay for the cost of building the house, and once the house is completed, the loan is converted into a permanent mortgage, usually with a loan term of 15-30. year. The advantage of this approach is that there is only one set of closing costs to pay.
Builder deposit / down payment – how is this different from the down payment?
When you buy a new home from a production builder, such as K. Hovnanian, you are buying into a community that is being developed by the builder on land they have already purchased. You will not normally need to take out a construction loan as the construction process will be funded by the builder of the house. As with the purchase of a resale home, the down payment is due when you close your new home. Before your down payment is due, however, you will need to pay money as a builder’s deposit, or down payment.
The builder’s deposit is the same concept as the down payment you would make on a resale home, although the amount is usually higher. When a homebuilder invests in building a new home for you, they take on greater risk and therefore seek more protection. Typically, you will need to pay 5-10% of the base price as a down payment. When purchasing with cash, this amount will be even higher. If you are selecting options and upgrades for your new home, you will typically be required to pay 25-50% of the value of the improvements as a down payment from the builder. The deposit is due when you sign a new home purchase contract. Find out more about the deposit by clicking here!
Down payment on a new home loan
A new home buyer will usually obtain financing while the new home is being built and negotiate the down payment at that time. The amount of the down payment will depend on a number of factors including the buyer’s credit history and credit rating, the availability of cash and the type of loan. Homebuyers eligible for VA or USDA loans cannot make a down payment, while conventional loans require a down payment of at least 3%, with a typical down payment being 20%.
The timing of the down payment is no different for a new home purchase than it is for the down payment on a resale home. The deposit, as well as the closing costs, is due at the closing. The amount paid as a down payment from the builder is applied to the down payment and closing costs.
To summarize, the following scenarios are possible when buying a new home:
The buyer must take out a new construction loan and pay 20 to 30% when signing the contract. When the house is completed, the buyer takes out a classic loan, with a down payment depending on the type of loan
The builder finances the construction and the buyer pays 5-10% plus a portion of the options and improves the value as a builder’s deposit upon signing of the contract. A deposit of 0% to 20%, depending on the type of loan and other considerations, is due at closing. The money paid as a down payment from the builder is applied to the down payment.
K. Hovnanian builds quality new homes across the United States, offering a variety of home designs and price ranges. Visit khov.com to find a new home community in your area.