When Do Mortgage Payments Start When Building A Home?

New construction homes have only become more appealing to many prospective owners in recent decades. The benefits of buying a new construction home are many, whether you purchase from a developer or custom build one. Going the latter route can ensure that you get the exact home that you want, compared with a "spec" or "move-in ready" home that you might find in new residential communities. When constructing your own home, you might wonder when exactly you'd have to start making mortgage payments. Technically, you don't make mortgage payments until the home is finished, but you will also be required to pay for the actual construction process.

There are a couple of different types of new construction homes you can buy. Aside from a custom-built home, it's possible to buy a spec home from a developer that is also new construction. It's even possible to come across a single already built home by a small investor. In these cases, though, you don't typically make payments until the homes are actually finished being built, and the developer pays for the construction process. The developer will also require you to put down a deposit of around $1,000 to $2,000 to effectively reserve the home during the construction process. Then, once the home is complete, you're expected to either pay for it in cash or take out a mortgage with a lender. It's also a good idea to get pre-approval from a lender before choosing a new home and giving a security deposit to a developer. Custom building involves a different financial process than working with a developer on a new construction home.

When you buy a home from a developer, you're essentially paying for the finished product via a mortgage. On the flipside, a newly built custom home without a developer will require that you pay the upfront costs associated with the project throughout the entire building process. Unless you're paying for the entire project with cash, building a new home in this way will require a construction loan.

A construction loan primarily covers the costs associated with the actual building process, including the lot and materials, as well as labor. It may also cover the cost of permits if you haven't yet obtained these. Unlike a mortgage that is paid over a period of several years from the get-go, a construction loan has a shorter timeframe of about several months, depending on how long it takes to complete building your home. You will need to start making payments to your lender on a construction loan immediately. The down payment for a construction loan is also significantly higher compared to a typical mortgage due to the shorter timeframe.

Another option is getting a mortgage immediately at the end of your construction loan, or a construction-to-permanent loan. This can be valuable if you can't pay the entire construction loan in cash after building is complete. In these cases, whatever you owe from the initial loan is rolled into a mortgage with regular monthly payments over a fixed period of time. At this point, your mortgage payments technically begin after construction is complete, but you'll still need to fulfill the terms of your initial construction loan.