When Do You Pay for a New Construction Home?

Purchasing a new construction home involves a financial process distinct from buying an existing property. Unlike a single transaction, payments for a newly built residence are typically phased, aligning with its development stages. This structured payment approach helps manage the significant investment over time, providing transparency regarding financial milestones. Understanding these stages is important for prospective homeowners to budget effectively and prepare for the financial commitments.

Initial Financial Commitments

Initial financial commitments secure the property and allow for customization. An earnest money deposit is typically among the first payments required. This deposit demonstrates a buyer’s serious intent to purchase the home and often ranges from 1% to 5% of the total purchase price, though it can be higher for custom builds or in competitive markets. The earnest money is generally held in an escrow account or by the builder and is applied towards the final purchase price at closing.

Beyond the earnest money, buyers encounter deposits for design center selections or upgrades. These payments are due when buyers choose personalized features, finishes, and optional enhancements for their home, such as flooring, cabinetry, or smart home technology. These upfront payments ensure that the builder can procure specific materials and integrate customizations into the home’s construction schedule.

Construction Loan Disbursement Stages

Payments transition into a structured series of disbursements known as “draws” from a construction loan. These are progress payments released to the builder as specific construction milestones are achieved. Common milestones include foundation, framing, rough-ins for plumbing and electrical systems, drywall installation, and exterior completion. Each draw is a percentage of the total construction cost, aligning with the value of the work completed.

Before a draw is released, an inspection by a third-party or the lender’s representative verifies that the work is completed according to plans and meets quality standards. This verification process protects the buyer and the lender. In a buyer-financed construction loan, the buyer is directly involved in approving these draws after receiving inspection reports. For builder-financed construction, the builder manages the draws internally with their lender, which can simplify the process for the buyer.

The construction loan draw schedule outlines when funds will be dispersed to the contractor throughout the project, rather than as a single lump sum payment. This schedule is agreed upon by the client, contractor, and the bank. The process often takes 5-10 business days for a draw request to be processed after inspection.

Final Payments and Closing

The final financial obligations for a new construction home occur at or just before closing. At this stage, the remaining balance of the purchase price, not covered by previous draws, becomes due to the builder. This final payment marks the transfer of ownership from the builder to the buyer.

In addition to the final payment, buyers are responsible for various closing costs. These costs typically range from 2% to 6% of the home’s purchase price, though they can sometimes be higher for new construction. Common closing costs include loan origination fees, charged by the lender for processing the loan. Appraisal fees cover the cost of assessing the home’s value, and title insurance protects against ownership disputes.

Other expenses due at closing often include recording fees, which register the property’s deed and mortgage documents with the local government. Buyers also typically prepay for certain expenses, such as a portion of annual property taxes and the first year of homeowners insurance. New construction may also incur unique builder fees, such as administrative or processing fees, or initial homeowners association (HOA) fees if the property is part of a managed community.