An advance payment is money you give before you receive a product or service — in homeownership, usually to a contractor, lender, or service provider before work begins or a loan closes.

The term covers several different situations. A contractor might ask for a deposit before starting a renovation. A lender might require an upfront fee before processing your mortgage. A utility company might ask you to prepay for a service hookup. Each one works differently, carries different protections, and involves different risks.

Understanding what you're paying for, when you'll see the work or service, and what happens if something goes wrong is the difference between a reasonable business practice and money you may not get back.

Key Takeaways

  • Contractor deposits typically range from 10 to 50 percent of the total job cost and should be held in a separate escrow account, not the contractor's personal account.
  • Mortgage lenders may charge origination fees, appraisal fees, or credit report fees upfront; these are separate from your down payment and should be listed on your Loan Estimate.
  • A written contract that specifies what work will be done, the timeline, and what happens if the contractor abandons the job protects you far more than a handshake agreement.
  • State contractor licensing boards and your state's attorney general office can tell you whether a contractor has complaints or disciplinary history before you hand over money.
  • Never pay the full amount upfront for any home service; staged payments tied to completed work phases are the standard practice for legitimate contractors.

Contractor deposits and what they actually cover

When a contractor asks for an advance payment, they're usually asking for a deposit to cover materials and to secure your project on their schedule. This is normal. What matters is how much, when, and where the money sits.

A reasonable deposit is typically 10 to 30 percent of the total contract price for most home repairs and renovations. Larger jobs sometimes run 25 to 50 percent, but anything over half the total cost upfront is a red flag. The deposit should cover the contractor's material costs and a reasonable buffer for their time planning the job — not their entire profit.

The deposit must be held in a separate escrow account at a bank or title company, not in the contractor's personal checking account. This protects you if the contractor goes out of business or abandons the job. Many states require this by law; your state's contractor licensing board can tell you what the rule is where you live. Ask the contractor directly: "Where will my deposit be held?" If they say their business account, ask for the bank name and account number, then call the bank to confirm the account exists and is designated as an escrow account.

Mortgage lender fees that come before closing

When you apply for a mortgage, the lender will charge you several fees before you ever close on the house. These are separate from your down payment and are not optional — they're the cost of processing your loan.

Common upfront fees include an origination fee (usually 0.5 to 1 percent of the loan amount), an appraisal fee (typically $400 to $600), a credit report fee (usually $25 to $75), and a processing fee (often $300 to $500). Some lenders bundle these; others list them separately. All of them must appear on your Loan Estimate, which the lender is required to send you within three business days of your application.

You can shop these fees. Different lenders charge different amounts for the same service. Before you commit to a lender, compare the Loan Estimates from at least two or three. The appraisal fee is often negotiable, and some lenders will waive or reduce the origination fee to win your business. Do not pay any fee until you have a written Loan Estimate in hand and you've decided to move forward with that lender.

When you should never pay in advance

There are situations where an advance payment is a warning sign, not a normal business practice. If a contractor demands full payment before any work starts, that is not standard. If they refuse to put the terms in writing, that is not standard. If they pressure you to pay in cash or by wire transfer, that is not standard.

Legitimate contractors expect to be paid in stages: a deposit when you sign the contract, a payment when materials arrive or a major phase is complete, and a final payment when the work passes inspection and you're satisfied. This protects both of you. It gives the contractor cash flow to buy materials and pay workers, and it gives you leverage to make sure the work is done right.

If a contractor has no online presence, no business license, no references you can call, and no insurance, an advance payment is money you may not see again. Check your state's contractor licensing board website before you hand over anything. Most states allow you to search by name or license number. If they're not licensed and your state requires it, do not pay them.

What a written contract should say

The contract is your only protection if something goes wrong. It should include the scope of work (what exactly will be done), the total price, the payment schedule, the start and end dates, what happens if the contractor quits, and what happens if you're not satisfied with the work.

A good contract also specifies who buys materials, who is responsible for cleanup, whether permits are included in the price, and what warranty (if any) covers the work after it's done. It should say that the contractor carries liability insurance and workers' compensation insurance, and it should give you the right to see proof of both before work starts.

Never sign a blank contract or one with blank spaces for price or dates. Never sign something that says "price to be determined" or "timeline TBD." If the contractor won't fill in the details, they're leaving themselves room to change the terms after you've paid. A contract protects you only if both of you agree to the same thing in writing.

How to reduce your risk before paying

Before you give any contractor an advance payment, do three things. First, call your state's contractor licensing board and ask whether the contractor is licensed, whether they have complaints on file, and whether any complaints have been resolved. This takes 10 minutes and costs nothing.

Second, ask for at least three references from jobs completed in the last two years. Call those references. Ask whether the contractor showed up on time, whether the work was done well, whether they cleaned up after themselves, and whether they were paid in full. If a contractor won't give you references, that is a reason not to hire them.

Third, verify their insurance. Ask for a certificate of liability insurance and workers' compensation insurance. Call the insurance company to confirm the policy is active and covers the work you're hiring them for. A contractor without insurance is a contractor who will sue you if someone gets hurt on your property.

Prepayment for utilities and services

Some utility companies and service providers ask for a deposit or prepayment before they connect service to your home. This is common for electricity, gas, water, and internet, especially if you're new to an area or have no credit history with them.

A utility deposit is usually refundable after you've paid on time for 12 months. Ask the company in writing what the deposit covers, when it will be returned, and whether it earns interest. Some states require utilities to pay interest on deposits; others don't. Get the answer in writing so you have proof if there's a dispute later.

For internet and phone service, prepayment usually means paying for the first month or two upfront. This is normal and non-refundable — you're paying for service you'll receive. Make sure you understand the cancellation policy before you pay. Some providers charge an early termination fee if you cancel within a certain period.

Frequently Asked Questions

Can I get my contractor deposit back if they don't start the job on time?

Yes, if your contract specifies a start date and the contractor misses it without a written agreement to delay. Contact the contractor in writing and give them a deadline to start (usually 7 to 14 days). If they don't, you can demand the deposit back. If they refuse, you can file a complaint with your state's contractor licensing board or take them to small claims court.

What if I pay a mortgage lender's upfront fees and then get denied for the loan?

Some fees are refundable if you're denied; others are not. The appraisal fee is usually non-refundable because the lender paid for the appraisal whether you get the loan or not. The credit report fee is typically non-refundable. The origination fee may be refundable depending on the lender's policy. Ask before you pay, and get the answer in writing.

Should I ever pay a contractor by wire transfer or cryptocurrency?

No. Wire transfers and cryptocurrency are nearly impossible to reverse if something goes wrong. Pay by check, credit card, or bank transfer through your own bank. These methods give you a paper trail and some recourse if the contractor takes your money and doesn't do the work.

What's the difference between a deposit and a down payment?

A deposit is money you give to hold a contractor's time and cover their material costs; it's part of the total price. A down payment on a house is money you give the seller to show you're serious about buying; it's held in escrow and applied to your purchase price at closing. They work differently and are protected differently.