Building a House: When Do You Pay for It?

Building a house involves a series of financial commitments that unfold across various stages of the construction process. Unlike purchasing an existing home, payments for a new build are not made in a single lump sum. Instead, the financial structure is designed to align with the progression of the project, ensuring funds are released as specific construction milestones are achieved.

Initial Payments and Pre-Construction Costs

Before any physical construction begins, several initial payments and pre-construction costs are typically required. These expenses cover the preparatory work necessary to get the project off the ground. For instance, if land is not already owned, its purchase will involve closing costs that commonly range from 2% to 6% of the land’s purchase price, or 2% to 5% of the loan amount if financed. These costs can encompass appraisal fees, title searches, attorney fees, and sometimes loan application or origination charges.

Beyond land acquisition, fees for architectural design are incurred to create the home’s blueprints and specifications. Securing necessary building permits also requires upfront payment, with costs typically ranging from $150 to $2,000 for main building permits, although complex projects needing multiple permits can incur fees up to $7,500. These permit fees might be a flat rate, a percentage of the total construction cost (often between 0.5% and 2%), or calculated per square foot. Additionally, builders often require an initial deposit, usually between 10% and 20% of the total project cost, to cover preliminary materials, initial labor, and scheduling arrangements.

Progress Payments During Construction

Progress payments, also known as “draws,” are periodic payments made to the builder as specific construction milestones are completed. Instead of a single upfront payment, funds are disbursed in installments, reimbursing the contractor for labor performed and materials used during each phase. This method ensures that payments correspond directly to the advancement of the construction project.

Payments are typically triggered by the verified completion of predefined stages. Common milestones include the completion of the foundation, framing completion, and the installation of rough-ins for plumbing, electrical, and HVAC systems. Subsequent payments follow as drywall is installed, exterior finishes are applied, and interior trim work progresses. An example payment breakdown might involve a 30% payment at project start, 30% at framing completion, 30% at trim completion, and the final 10% upon project completion.

Lenders and homeowners often rely on third-party inspectors to verify that the work at each milestone meets agreed-upon specifications and building codes before releasing funds. These inspections, such as pre-pour (foundation), pre-drywall (framing and rough-ins), and final inspections, are crucial checkpoints. This ensures accountability and verifies that the construction is progressing as planned before further funds are committed.

Final Payments and Project Completion

As the home nears substantial completion, the process shifts towards the final payment, often referred to as the “final draw.” A key step involves a final walk-through with the builder, during which a “punch list” is created.

The punch list is a detailed document outlining any minor items that need correction, adjustment, or completion before the project is considered fully finished. These can range from small cosmetic issues, such as paint touch-ups or adjusting cabinet doors, to ensuring all systems and appliances function correctly. The final payment is generally released only after all agreed-upon work is complete, the punch list items have been addressed to satisfaction, and final inspections have passed.

A common practice in construction contracts is “retainage,” where a percentage of each progress payment, typically 5% to 10%, is withheld by the owner. This retained amount serves as a financial safeguard, ensuring the builder completes all work to the required standards and addresses any deficiencies. The accumulated retainage is then released as part of the final payment, contingent upon the project’s satisfactory completion, resolution of the punch list, and often the provision of lien waivers from subcontractors and suppliers.

Understanding Construction Loans

Construction loans serve as the primary financial mechanism dictating when funds are available to make these staged payments. Unlike traditional mortgages, which disburse funds as a single lump sum for an existing property, construction loans are short-term financing options specifically designed to fund the building process. These loans typically have a term of 12 to 24 months, aligning with the expected duration of the construction project.

Funds from a construction loan are disbursed in stages, known as draws, which directly correspond to the progress payment schedule of the build. As each construction milestone is reached and verified, the lender releases the next portion of the loan. During the construction phase, borrowers typically only make interest payments on the amount of funds that have been disbursed to date, rather than on the full loan amount.

Lenders require thorough inspections and verification of completed work before releasing each subsequent draw. These inspections ensure that the project is progressing according to the approved plans and budget, and that the funds are being used appropriately. Inspectors verify progress against project plans, assess material quality, and confirm building code compliance. Once construction is complete, many construction loans can be converted into a traditional, long-term mortgage, simplifying the transition from building to long-term homeownership. Construction loans often have stricter qualification criteria and higher interest rates, typically about a percentage point higher than conventional mortgages, and may require larger down payments of 20% to 30% due to the increased risk associated with an uncompleted asset.