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Builder Deposits in a New Home Neighborhood.
Get pre-approved first
Builder deposits are often non refundable and you want to make sure you can get your financing before you sign the contract. Often builders will pay some of the closing costs if you use their preferred lender. It’s still OK to get a local lender to pre qualify you first and then compare with the builders lender. Make sure you tell all lenders you shop know you are comparing.
The pre-approval is only as good as the information you provide your lender. It pays to be very thorough at this stage because you don’t want expensive surprises later. Your lender will check your credit and review your income and debts to determine the loan amount you will be approved for and the loan options. You will discuss what is a comfortable payment for you, what cash you will need for a down payment, and closing costs.
Next find a buyers agent familiar with new construction sales to guide you through the process. Why you need a buyers agent for new construction
When you are planning on building or buying a new home from a builder there aren’t set rules about deposits, upgrades and timing of payments. There is also some risk involved because your new home doesn’t exist yet and that can be both good and bad.
The amount and timing of deposits can depend on the neighborhood and builder. In the Triangle area you will find new home neighborhoods with builders who sell just a few custom homes a year to large national and regional builders (production builders). The plans and changes provided and allowed by the builders can vary from only cosmetic upgrades to structural changes. The builders contract (totally biased toward them of course!)will detail the amount and timing of deposits and other payments.
Custom builder deposits
A small custom builder (up to about 20 houses a year) almost always has the largest deposit requirement, often 5%-10% due at contract signing. It’s pretty much always non refundable so you will need to make sure you can get financing before you sign the contract. Builders feel justified with this large deposit because they will have to purchase the lot from the developer,get a construction loan, and build to your specifications.
After the contract is signed you will usually have to pay for half to all changes and upgrades in cash at the time of the change. You will have a significant amount of cash tied up during the building process so if you have a home to sell you should go ahead and do that before you contract to build even if you have to rent during construction. Builders won’t do contingencies except in special cases when they were planning on building the home as a spec anyway. I would not recommend signing a builder contract and then putting your house on the market expecting a sale, even if you have the cash.
You may get the construction loan
Sometimes a small builder doesn’t have the capital to purchase the lot and get a construction loan. The builder may have an arrangement with the developer to purchase lots as they get a contract. The builder may have you get the construction loan and the lot will be purchased by you with the first construction draw. Lenders usually will lend you 75-80% of the appraised value for a construction loan and you will be responsible for construction loan interest (interest only on the amount drawn) and any changes above the amount of the loan. The bank will send a representative to check the progress of the home and releases construction funds to the builder depending on the % of completion according to a preset schedule. Your construction loan can be converted to permanent financing when the home is completed although you won’t be able to lock in your rate until 60 days or so before completion. You shouldn’t have to give a builder deposit if you are getting the construction loan.
Production builder deposits
The production builders in our area really vary with the amount of deposits required. They range from a set amount of $5000-$10,000 or a percentage of around 3%-5%. Upgrades are handled differently too, with some builders requiring only structural changes to be paid in cash to all upgrades to be paid in cash at the time of selection or change.
If you are getting a low down payment loan, a USDA or doctor loan for example, the depost amount may be negotiable and we just have to deal with that on an individual basis.
If a builder has a home under construction the deposits usually are determined by the construction stage and the amount of customizing necessary. If the house is basically finished and you are pre-approved 1% will usually be enough deposit. You may also be able to negotiate the price but more commonly upgrades depending on what other inventory the builder has.
The deposits are set out in the builder contract. The builder contract is is to protect the builder not the buyer. In my experience the builders won’t make changes at all to their contract but it is a good idea to have your attorney go over the contract with you so you understand what you are signing. You should also check the builder references and suppliers because there is risk involved for your deposit money and sometimes the clues that a builder is in financial trouble are not obvious.
Buying an existing home is the easiest way to go and you may be able to negotiate the price but building your home will give you the home you really want and can be a fun and rewarding process if you are prepared.
Deposits when you have a no or small down payment loan
Some lenders have little or no down payment loans even in 2016. These are often called doctor loans. FHA loans have small down payments. What do you do if the builder deposit is 5% or 10% and you don’t have that? I have found that builders will usually reduce their deposit if their preferred lender has confirmed the situation. This is my experience around the Triangle and may not be true where you live.