Seeing your dream home come to life right in front of your eyes is an incredible process. It’s something you’ve waited so long for, and you’ve picked out every little detail down to the colors, patterns, and finishes. There’s no denying that building your dream home requires many steps.
One of the most significant milestones comes when it’s time to put money on the table. If you’re trying to plan out the timeline or anticipate the next check you need to write, here’s an explanation of how you can approach the deal.
Building a custom home can be an exciting and rewarding experience. But financing the construction comes with unique challenges, including paying closing costs twice with some types of construction loans. This guide will walk you through exactly when closing costs are due so you can plan accordingly.
What are Closing Costs on a Construction Loan?
Closing costs are the fees charged to process and finalize a loan. Just as with a traditional mortgage, you’ll pay closing costs when you take out a construction loan. These costs may include:
- Origination fees to the lender
- Appraisal fees
- Title fees
- Recording fees
- Credit report charges
Closing costs typically range from 2-5% of the total loan amount So on a $300,000 construction loan, you can expect to pay $6,000 – $15,000 in closing costs The specifics vary by lender.
Closing costs are in addition to your down payment. While closing costs are usually wrapped into the loan amount, you’ll likely need cash on hand to cover the down payment.
When Are Closing Costs Due on Construction Loans?
When you pay closing costs depends on the type of construction loan
Construction-to-Permanent Loans
With a construction-to-permanent loan, you only pay closing costs once at the beginning of the project This single-close loan is used to finance construction and then converts to a traditional mortgage once building is complete
Since this acts as both the construction loan and permanent home loan, you’ll pay closing costs upfront when the loan originates. You won’t owe any additional fees at the end.
Construction-to-permanent loans simplify the process. However, you won’t be able to lock in your permanent mortgage rate until construction is finished.
Construction-Only Loans
Construction-only loans function as short-term financing to fund the building phase. But the loan must be paid off in full once construction is complete.
At that point, you’ll need to apply for standard mortgage financing. This means you’ll pay closing costs twice:
- When originating the construction loan
- When securing your permanent mortgage
So expect to budget for two sets of lender fees and settlement charges. The upside is you can lock in a mortgage rate early in the construction process.
Tips for Managing Double Closing Costs
If you opt for a construction-only loan, you can take steps to reduce the sting of double closing costs:
Shop around: Get quotes from multiple lenders to find the lowest rates and fees. Even small differences can save you hundreds.
Ask about discounts: Some lenders offer discounts for bundling your construction loan and permanent mortgage.
Lower your interest rate: Paying “points” upfront can secure you a lower mortgage rate and interest savings down the road. This can offset extra closing costs.
Roll fees into your loan: Including closing costs in your mortgage amount means you won’t need cash upfront. Just beware a higher loan balance.
Other Costs to Budget For
On top of closing costs, be prepared for other construction loan fees:
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Interest payments – You’ll owe monthly interest on construction loans from the time funds are dispersed. With construction-only loans, you also pay interest twice.
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Inspection fees – Most lenders will require professional inspections at different phases of construction before releasing payments. Expect to foot this bill.
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Credit for delays – If the project timeline slips, you may need to pay extension fees and extra interest to the lender. Pad your budget for contingencies.
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Origination fees – Expect to pay loan origination fees on both the construction loan and permanent mortgage. Shop around for the lowest costs.
How Much Cash Do You Need at Closing?
Closing cash needed will depend on your specific loan terms. Be prepared to bring:
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Down payment – Usually 20% or more of total construction costs
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Closing costs – Any fees not rolled into your loan
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Initial interest payments – First 1-2 months of interest due upfront
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Escrow deposits – For taxes and insurance during construction
Discuss required cash with your lender so you can have funds ready by closing day.
When Do You Pay Closing Costs on Different Loan Types?
Here’s a quick summary of when closing costs are due on construction loans:
| Loan Type | When Are Closing Costs Paid? |
|---|---|
| Construction-to-Permanent | One time at initial closing |
| Construction-Only | Twice – at opening and when securing permanent financing |
| Owner-Builder Loan | Once upfront |
| Renovation Loan | Once at origination |
Ready to Move Forward?
Construction loans allow you to build your dream home tailored precisely to your needs. But the financing process is more complex than a traditional mortgage. Now that you know when closing costs are payable, you can budget wisely. Meet with lenders to choose the optimal loan product and lock in the lowest rates. With careful planning, you’ll be set to break ground on your custom home build.
When is the down payment due on a new construction home with builder financing?
To start construction and set up builder financing, you’ll need to put down a builder deposit, which can feel like a down payment. You will also need to pay another down payment when you set up your mortgage after construction is complete.
Generally, the builder deposit is 10% of the total construction costs before construction begins. Once you’ve paid the builder deposit, you may have to pay the full cost of custom upgrades and change orders.
After construction is finished, you’ll take out a mortgage to pay off the builder and buy the lot. This mortgage will require a down payment, which could vary from 3.5% up to 30%, depending on the program and lender.
- The builder finances the construction themselves.
- The buyer must pay a “builder deposit,” which means around 10% in earnest money.
- The buyer might need to pay for any additional upgrades or changes to the new construction home.
- When construction is complete, the buyer must obtain a standard mortgage.
- The buyer has to pay a down payment and closing costs when setting up the mortgage loan.
How are new construction home loans paid?
When you obtain a new construction loan, you will be responsible for only paying interest until construction is complete. The bank tracks of disbursed funds when a specific portion of the home is completed. These loans are real estate secured but tend to have a higher interest rate due to being short-term.
You can save money on your new construction loan by making sure construction happens on time. If, for some reason, you get to the end of the short-term loan period before construction is complete, you will have to extend your current construction loan. If the construction lender approves, your construction loan either is extended or increased – for a cost.
Assuming your builder stays on schedule, and everything goes to plan, you’ll need to go to a lender and take out a standard mortgage loan when construction is complete. The new mortgage will be used to pay off your new construction loan balance. This will require you to pay closing costs , which will vary depending on the program and lender.
- Buyer needs to obtain a new construction loan before construction work begins.
- These loans are short-term and have a higher interest rate.
- The buyer will obtain a standard mortgage when construction is complete.
- The buyer will pay closing costs for both the construction loan and mortgage that they obtain later.
When Do I Make Payments On a Construction Loan (IN DETAIL)
FAQ
Are closing costs factored into the loan?
What happens at the end of a construction loan?
Is a construction loan harder to get than a mortgage?
How do interest payments work on a construction loan?
Do construction loans require closing costs?
Construction loans require closing costs just like traditional mortgage loans. Along with the processing and origination fees the mortgage lender charges, you’d also have to pay for an appraisal, title insurance, and legal fees. An advantage of construction-to-permanent financing is paying only one set of closing costs.
Who pays the closing costs in a new construction transaction?
In a new construction closing transaction, it’s typical to see both the selling and the buying sides pay some of the closing costs. While the buyers typically pay fees associated with the loan, title, and government charges, the sellers pay the commissions out of the purchase price.
Do construction loans have to be paid off?
Some have to be paid off once the home is built, and some can be converted into a mortgage that you pay down over time. The right type of construction loan for you will depend on your budget, your construction timeline, and how you plan to use the house once it’s built. In this article (Skip to) What is a construction loan?
Does a construction-to-permanent loan require a second closing?
“Not all lenders offer a construction-to-permanent loan, which involves a single loan closing,” says Kaminski. “Some require a second closing to move into the permanent mortgage, or an end loan.” Unlike traditional mortgages, which carry fixed rates, construction loans usually have variable rates that fluctuate with the prime rate.