When Do You Pay Closing Costs on a New Construction Home?
Understand the unique payment schedule for closing costs on new construction homes, detailing when funds are due from start to finish.
Closing costs represent various fees associated with purchasing a home and securing financing. These expenses are separate from the down payment and are necessary to finalize a real estate transaction. While a significant portion of these costs is typically paid on the closing day, various fees are disbursed at different stages. Understanding the timing of these payments is important for budgeting a new construction home purchase.
Understanding Initial Cost Disclosures
Buyers first receive an estimate of their closing costs through the Loan Estimate (LE). Lenders are required to provide this three-page document within three business days of receiving a loan application. The Loan Estimate offers a comprehensive overview of the loan terms, estimated interest rate, monthly payment, and an itemized breakdown of anticipated closing costs, allowing for comparison shopping among lenders.
As the loan process progresses, the Closing Disclosure (CD) is issued. This five-page form must be provided to the borrower at least three business days before the scheduled closing date. The Closing Disclosure details the final loan terms and all closing costs, and it should align with the initial Loan Estimate. These documents, governed by TRID rules, enhance transparency and prevent unexpected charges at closing.
Payments Made Before Closing Day
While most closing costs are settled at closing, several fees are typically paid upfront, particularly for new construction. An appraisal fee, which can range from $500 to over $1,000, is usually paid directly to the appraiser before closing to determine the property’s market value. This valuation is a requirement for the mortgage lender to ensure the home’s value supports the loan amount.
The home inspection fee, often $300 to $500, is paid to a professional inspector to assess the property’s condition. Credit report fees, typically $30-$50, are paid early to cover the buyer’s credit history. Earnest money, a deposit made when signing the purchase agreement, is typically 1% to 5% of the purchase price and is often applied towards the down payment or closing costs.
Final Payments at Closing
Most closing costs are due on the closing day, when ownership of the new construction home is transferred. Buyers review the final Closing Disclosure, which outlines all finalized figures. The total amount due, including the remaining closing costs and the down payment, is then remitted.
Payment is typically made via wire transfer from the buyer’s bank account to the title company or escrow agent. A cashier’s check may be accepted, but wire transfers are preferred for large transactions due to security and speed. The title company or escrow agent disburses these funds to various parties, such as the lender for origination fees, local government for recording fees, and other service providers.
Timing Variations for New Construction
The timeline for paying closing costs on a new construction home differs from an existing home due to the extended build period. Builders may offer incentives or contributions towards closing costs, typically applied at closing and often contingent on using the builder’s preferred lender. These incentives can reduce the buyer’s out-of-pocket expenses.
Extended construction timelines can impact financing, potentially requiring extended rate locks on mortgages to protect against rising interest rates. Such extensions might incur additional fees. Unexpected construction delays can shift the final closing date, necessitating adjustments to financial planning and potentially requiring re-issuance of the Closing Disclosure if changes occur. If a construction loan converts to permanent financing, there might be a second set of closing costs.