Down Payments, Construction Loans, and Closing Costs When Building A New Home

Financing the construction of a new home is a little different than financing the purchase of an existing home. Both can require a down payment and closing costs. The biggest difference between the two is a construction loan may be required when building a new home. Or not!

Madison Homebuilders strives to make building a new home as simple and affordable as possible. This post describes in detail the three largest costs involved in building a new home. The good news is, when you build with Madison Homebuilders, these costs do not apply!

Yes, that’s right! Qualified landowners who choose Madison Homebuilders can save thousands on building a new home because with us:

  • There’s no down payment!
  • There’s no construction loan!
  • And we will pay your closing costs!

Let’s take a closer look at each of these costs below.

Down Payment

Banks and lenders never finance 100% of the value of a home. For example, someone purchasing a $200,000 home cannot borrow the entire sale price. Banks and lenders want to see some amount of money up front before securing a mortgage.

The amount of money you can afford for your down payment will determine the type of mortgage you qualify for. Borrowers with the standard 20% down payment can secure a conventional loan. Conventional loans do not require borrowers to pay expensive mortgage insurance premiums. The other option is an FHA loan, which only requires a 3% down payment. The federal government secures FHA loans and requires borrowers to pay monthly mortgage insurance premiums.

Unlike other builders, Madison Homebuilders does not require a down payment to begin construction. If you already own your lot, you don’t start paying for your new home until we’re finished building it. Compared to buying an existing home, this can save you thousands of dollars of cash out of your pocket up front.

Construction Loan

While every construction loan is different, a few similarities do exist. A construction loan is a short-term loan required to fund the construction of a new home. Most homebuilders will not begin building a new home without first securing a construction loan. The builder then takes draws from the loan during the construction period to pay their builder, which in many cases can last 6 months or so.

While the rules sometimes change, including for 2014 construction loans, most borrowers pay interest on the draws they take out during the construction period. The remaining balance is due when the builder finishes building the home. Once the builder finishes, the buyer can roll the construction loan balance into a standard mortgage.

There are two considerations to be aware of when working with a builder who requires a construction loan. These two elements combined make construction loans an expensive cost.

1) In most cases, payments are interest only payments. These payments are not applied to the principal, and the entire balance is due upon completion of the home. The money you pay in interest is cash out of your pocket.

2) If you do not roll your construction loan into your final mortgage, you will pay closing costs on both loans.

Madison Homebuilders has the financial strength to build your home without requiring you to make a down payment or pay interest on an expensive construction loan. Depending on the size and total cost of your home, this can add up to thousands of dollars of extra savings in your pocket. We don’t get paid until we’re finished.

Closing Costs

Closing, sometimes referred to as settlement, is the date you complete your home loan and receive the keys to the home. Buyers usually are responsible for paying any extra fees and costs charged by the lender and other third parties on this date. You also pay your down payment at closing as well. Closing costs are the sum of these fees and charges.

Closing costs often include credit checks, loan origination and processing fees, attorney’s fees, home inspections and appraisals, and points (up front fees paid to get a lower interest rate on a mortgage), among others. On average, closing costs range just over 2.2% of a home’s purchase price. For example, closing costs on a $200,000 home could add up to $4,400 or more.

Once again, when you build with Madison Homebuilders, these are costs that you do not have to pay. We pay the allowable, standard closing costs on your loan! That’s thousands of dollars more that you get to keep in your pocket. Some builders leave you responsible for this large cost. We prefer to just leave you your keys.

Combined Savings

As you can see, all these costs add up quickly. With other homebuilders, this means more cash out of your pocket before you can start enjoying your new home. We don’t think that’s right.

Remember, Madison Homebuilders neither requires a down payment nor a construction loan for most homes. We also help pay the closing costs. This adds up to thousands of dollars of savings on your new home. On a $200,000 home, you could save up to $12,000 in construction loan interest and closing costs alone! No other homebuilder in North or South Carolina can do that!

These cost savings are just one of the many advantages of working with Madison Homebuilders. If you want to save money building your new dream home, we’d love to hear from you. Browse our customizable home designs and contact us to get started today!