- Builder Deposits
- Here is a video in case you would rather watch
- Deposits vary
- Buyers agent
- Amount and timing of deposits
- Custom builder deposits
- You get the construction loan
- Construction lender controls payments to builder
- Production builder deposits
- Spec home-Move in Ready deposits
- Contract specifies deposit amount
- Deposits when you have a small down payment loan
- Get pre-approved first
- Builder’s lender incentives
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Revised November 25, 2019
Here is a video in case you would rather watch
Builder Deposits in a New Home Neighborhood.
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.
It will help with risk and the negotiation process 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.
Amount and timing of deposits
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 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 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.
You get the construction loan
Sometimes a small builder doesn’t have the capital to buy the lot and get a construction loan. The builder may arrange with the developer to buy lots as they get a contract. You go to the bank and get the construction loan and you buy the lot 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.
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.