How to finance a newly constructed home

Financing a newly built home is typically similar to paying for an existing home, as long as you’re buying a home that’s part of a community under construction and not a custom home. But the cash you need for a deposit, a down payment and closing costs could be a little different when you’re purchasing new construction.

We asked Karla Melgar, a senior loan officer with Embrace Home Loans in Annapolis, Md., for her advice about cash needs for a newly built home.

1. Deposit: Builders require a deposit when you write a contract. It can be as little as $1,000 or as much as 5 percent of the purchase price, depending on the sales price and the type of loan. Some builders may be willing to work with you if you do not have the full deposit when the contract is written. Be honest with the builder’s sales agent, so you can negotiate the amount and the timing of the deposit before you write the contract. Builders may allow you to make the deposit in two installments, with the final installment usually due before the builder breaks ground. If that is the case, you should make sure the deposit dates and amounts are spelled out clearly in the contract.

2. Paying for options: Depending on the sales contract, a builder may ask a buyer to pay for options when they are selected; that payment may be nonrefundable.

Buyers should read their sales contract carefully to have a clear understanding of what the home must appraise for to have the mortgage approved. If the home appraises for the base price, but not the base price plus the cost of options, the buyer would be paying for the options separately out of their own pocket – the cost of options could not be included in the mortgage amount. But if the home appraises for the base price plus the cost of options, then the cost of options could be included in the mortgage.

For example, if the base price of the home is $400,000 and the buyer orders $50,000 in options, the home would need to appraise for $450,000 to have the options included in the mortgage. If the home appraises for $400,000, then the buyer would need to pay for the $50,000 in options out of pocket, as the cost of options wouldn’t be included in the mortgage.

3. Down payment: Down payments vary based on the type of loan program. Veterans may be able to buy with no down payment. Others, including first-time home buyers, may need as little as 3.5 percent down for an FHA loan. Nongovernment or conventional loan programs also offer 3 percent down payment options as well as 5 percent down payment options. However, qualifying for them is a bit more difficult, and often private mortgage insurance is required.

4. Closing costs: Closing costs vary widely based on the county and state where you’re buying. In the Maryland area around the Beltway, for example, it will typically be 4 to 6 percent, which includes the prepaid items to set up escrow accounts such as homeowner’s insurance and property taxes. But around the country, closing costs that include prepaid items usually range anywhere from 2.5 percent to 6 percent of the sales price.

It’s important to get an estimate of closing costs from a mortgage professional who is familiar with new construction and the added closing costs you may incur. Also, some builders will even offer to pay all or a portion of your closing costs, but make sure this is stated clearly in the sales contract.