Builder Deposits

Revised November 25, 2019

Builder discussing deposits

Here is a video in case you would rather watch

Builder Deposits in a New Home Neighborhood.

New home down payments vs builder deposit

The downpayment on your new home is determined  by your mortgage lender and is due when you close on your home . 

The builder deposit is the money you pay the builder at time of contract and is usually non refundable if you walk away from the house. It will be applied to your down payment when you settle on the home.

Do you need a buyers agent for new construction?

It will help with risk and negotiation if you have a buyers agent familiar with new construction sales. The builder pays the buyers agent for bringing you and repeat business to the neighborhood. It also avoids the liability of seller agency for the builder. You won’t save money if you don’t have an agent. The fee is already factored in. Builders want agent sales.

Why you need a buyers agent for new construction.

How much is a builder deposit for a new home?

The deposit can be as little as $5000 or as much as 10%. The amount and timing of deposits depends on the neighborhood and builder. In the Triangle you will find new home neighborhoods with builders selling just a few custom homes a year to large national and regional builders (production builders). Builders allowing changes  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.

Read about the differences between custom and production builders.

Custom home builder deposits

A small custom builder (up to about 20 houses a year) usually requires the largest deposit , 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 buy  the lot from the developer, get a construction loan, and build to your specifications.

If you add upgrades after you sign the contract you will usually have to pay for a % of changes and upgrades in cash at the time of the change. Building a home ties up a significant amount of cash. 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 Custom builder contract and then putting your house on the market expecting a sale, even if you have the cash because the deposit is non refundable.

Should you get the construction loan?

In many developments ,the builder gets the construction loan and adds the construction loan interest to the cost of the house. You pay the builder deposit at signing and when the house is finished the builder pays off the loan with the proceeds from the sale.

Sometimes a small builder doesn’t have the capital to buy the lot and get a construction loan. They will ask that you get the construction loan. 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 and upgrades above the amount of the loan.

Construction lender controls payments to builder

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. You can convert your construction loan financing to permanent financing at completion.  Your lender will tell you when to lock in. There are some great long locks available for an extra cost.  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%.  Ask about additional deposits for change orders and upgrades in the design center.
If you are getting a low down payment loan such as a USDA or doctor loan, we can often negotiate the deposit amount and timing.

Spec home-Move in Ready deposits

If a builder has a home under construction the construction stage and the amount of customizing determine the deposits. If the house is basically finished (move in ready) 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.

Contract specifies deposit amount

The contract specifies the deposits and when they are due.. The builder contract protects 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. Building your home is a fun and rewarding process If you prepare.

Deposits when you have a small down payment loan

Some lenders have little or no down payment loans even in 2019. 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 or stage their deposit if their preferred lender has confirmed the situation. This is my experience around the Triangle. Deposits may be different where you live.

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 builder’s 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. Be very thorough at this stage, 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.

Builder’s lender incentives

Why get pre approved if most builders will pay some closing costs if you use one of their preferred lenders? If the incentive is coming from the lender and not the builder it pays to shop around because the lender will make up the incentive from the rate or fees.  The closing cost incentive can be a good deal if the builder owns the mortgage company or if the builder contributes to the closing costs as well as the lender. The deal is always better if the lender knows you are comparing.

Your buyers agent will help with the deposit negotiations as well as the rest of the offer process.