The simple answer regarding the meaning of the word default in regards to contract law is that the buyer has failed to meet their obligations within the mutually agreed to contract.
Now, in regards to your specific issue. Since you have signed "papers" which I assume are a contract of some type, the specific explanation of "Default" under that contract should be written somewhere in the agreement.
If your potential losses are simply the $500.00, you may want to simply forfeit that amont in order to "Walk Away". However, if the agreement does allow the builder the potential to seek further damages as you mentioned of up to $5000.00. you may want to spend a few hundred dollars in order to discuss the matter with a real estate attorney.