Navigating the Complexities of Getting a Deposit for New Construction Homes

New construction projects can be exciting but also complex, especially when it comes to securing a deposit. Builders often require loan pre-approval before allowing a deposit to be put down, ensuring that buyers are financially capable of completing the purchase. However, the specifics can vary widely based on the builder and the location. In this article, we explore the factors that influence deposit requirements and the processes involved in securing a new construction home.

Loan Pre-Approval and Deposit Requirements

Typical Requirements for Mass Market Builders

When purchasing a house from a mass market builder who builds streets of houses at a time, it's common to get a contract for a new house with just a substantial non-refundable deposit. If you can't qualify for your loan when the house is completed, the builder keeps your deposit and sells the house to someone else at a potentially higher price since it is now 'ready to go.' This approach means these builders often limit the number and type of customizations you can make, as they need to manage their cash flow efficiently.

Custom Builders and Their Requirements

When working with a custom builder, the requirements can vary based on the ownership of the land. If you purchase the lot from the builder, it is typically included in the construction loan. If you already own your lot, the construction loan covers only the improvements, and if you take out a mortgage, the construction loan and the loan on the lot are consolidated.

Custom builders are usually smaller operations, with limited resources and capabilities. The builder we worked with could only build two houses at a time, managed by two project managers, each handling one house. The company's main business was siding and roofs, which necessitated a construction loan to manage their cash flow.

Understanding Construction Loans

A construction loan is a specialized type of financing designed for new construction projects. While the initial costs are higher than a normal mortgage rate, it protects you by holding your deposit in escrow until construction milestones are met.

Your deposit is spent first, and interest accrues once the lender starts providing funds to the builder. This loan structure is crucial for managing cash flow during the construction process. Additionally, construction contracts often contain contingencies, which can affect the final cost of the project, including change orders.

Change Orders in Construction Contracts

A change order is a legally binding modification to the construction contract that comes into play when you or the builder decide to make changes after construction has started. For example, you might change your design plans or the builder might encounter unexpected issues, such as finding rock during the foundation excavation.

Example of a Change Order

One example of a change order occurred when the water table was higher than anticipated during our foundation excavation. Our custom builder included a lot of drain piping around the foundation to keep it dry. However, this drainage system was too short to effectively manage the runoff, leading to a sump pump that would run nearly constantly. The solution was to create a 300-foot, 7-foot-deep trench for a gravity drain to the creek, ensuring that the sump pump rarely runs and our basement remains dry. This change order, while costly, was invaluable.

Another change order involved the roof structure. Initially, we had designed the second-floor rooms with trusses, but the architect decided to use I-joist engineered wooden beams for structural stability. These beams, being wider, required slightly different spacing and layout, leading to a significant change in the design than initially planned. The consequences were both wide and deep, affecting the overall layout and dimensions of the rooms.

Understanding the implications of change orders, both positive and negative, is crucial when embarking on a new construction project. While they can be costly, they often represent necessary and beneficial modifications that enhance the quality and functionality of your home.