We get this question all the time. Everyone knows that when you’re buying a home and financing it through your bank or mortgage lender, you need to put some money down to secure your loan. But how does it work when you build a home? Do you give the builder the down payment? Do you give the bank the down payment? Both?!?
(No, the answer is no… you don’t need to make two down payments!)
Let’s see if we can clarify it for you. In the world of new construction, builders are going to require some money down. We call it earnest money… similar to the earnest money you might put down with an offer you make on an existing or used home on the market. This earnest money serves two purposes:
- The money you put down secures the contract once signed.
- That earnest money (down payment) serves as your down payment with the bank/lender when closing day arrives and your new home becomes yours!
What Is Earnest Money?
Again, earnest money is basically just another term for a down payment. It serves as a good faith deposit by you, the buyer (or customer if building new with a home builder), to demonstrate to the seller (or builder) that you are serious and committed to purchasing or building. If the seller (or builder) rejects your earnest money offer, that money simply gets returned to you and negotiations continue or the parties part ways at that point. If your earnest money offer is accepted, that money then becomes part of your total down payment.
How Much Earnest Money (or Down Payment) Will I Need to Put Down to Build a New Home?
The amount of earnest money you’ll need to deposit depends on a few factors…
- What is the current state of the local real estate market?
- What amount will the seller reasonably expect in order to accept your offer… or, if building a new home, how much will the specific builder require you to put down in order to begin a new construction project?
- On average, you can expect to deposit between 1% and 3% of the total purchase price on an MLS transaction (this is where the term “earnest money” applies most often) and 5-20% on new construction (where we would call it a down payment… and again, that money goes towards whatever ultimate down payment amount your loan requires at closing).
Why Pay the Builder a Down Payment vs. Your Bank?
Ultimately, it’s a matter of personal preference, but in some cases it pays to deposit your earnest money with the builder directly. Why? In some cases, it’s simply a matter of showing good faith in your builder. In some cases, it expedites the construction phase of the project. When in doubt, just have the conversation with your builder to see which option may work out best for a win-win at the end of the day.