Building your dream home from the ground up can be an exciting and rewarding experience. However, it also requires a significant financial investment. That’s where 0 down construction loans come in. These specialized loans allow you to finance the building of a new home without requiring a down payment.
In this comprehensive guide, we’ll explain everything you need to know about 0 down construction loans including
- What is a 0 down construction loan?
- Benefits of a 0 down construction loan
- Types of 0 down construction loans
- Eligibility requirements
- The construction loan process
- Finding the best 0 down construction loan lender
- Pros and cons to consider
What Is A 0 Down Construction Loan?
A 0 down construction loan is a mortgage designed specifically to fund the building of a new home. It covers all costs associated with construction, including:
- Land acquisition
- Materials
- Labor
- Permits
- Fees
- Contingencies
Unlike a traditional mortgage, a 0 down construction loan does not require you to provide a down payment. The loan funds 100% of construction costs.
Once construction is complete, the construction loan is paid off and replaced by permanent end financing This is usually a traditional mortgage. At that point, you will need to provide a normal down payment.
0 down construction loans last around 6-12 months. They have higher interest rates and stricter qualification standards compared to conventional mortgages.
Benefits Of A 0 Down Construction Loan
The main benefit of a 0 down construction loan is obvious – you don’t have to provide a down payment. This enables you to build a custom home even if you don’t have tens of thousands saved for a down payment.
Here are some other advantages:
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Pay only on drawn funds: You only pay interest on the loan funds you have drawn, not the full amount. This saves money during the building process.
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One-time close: Many 0 down construction loans are structured as “one-time close” loans, meaning you close once on both the construction loan and permanent mortgage.
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Fixed rates: 0 down construction loans often allow you to lock in a low, fixed interest rate for the permanent mortgage.
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Custom home: You can build your dream home with custom features.
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Potential appreciation: A new custom build may appreciate faster than an existing home.
Types Of 0 Down Construction Loans
There are a few main types of 0 down construction loan programs:
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FHA 203(k) – This FHA-insured program covers purchase or refinancing along with home renovation costs in one loan. It requires only 3.5% down.
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VA One-Time Close – The VA zero down construction loan option for eligible veterans. It combines the construction loan and permanent mortgage into one closing.
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USDA Construction Loan – For low-income borrowers in rural areas. Allows for 100% financing. Property must be in an eligible rural location.
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Proprietary Programs – Some lenders offer their own portfolio construction loan programs that feature zero down payment options.
No matter which loan you choose, the construction phase will work the same way. The differences come down to eligibility requirements and the permanent financing terms.
Eligibility Requirements
While 0 down construction loans don’t require a down payment, you still must meet the lender’s eligibility standards. Typical requirements include:
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Credit score – Each lender sets minimum score requirements, often around 620-680. The higher your score, the better.
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Income & employment – You must have stable income and employment history. Two years of steady job history is common.
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Cash reserves – Expect to need 12-18 months of mortgage payments in reserves.
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Low DTI – Your total monthly debts divided by income should be below 43-45% in most cases.
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Contractor requirements – Lenders want experienced, licensed contractors on new builds.
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Appraisal – The home plan must appraise for the loan amount or higher.
Meeting these standards ensures you can qualify for permanent financing once the home is complete.
The Construction Loan Process
If you get approved for a 0 down construction loan, here is a general overview of the process:
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Find land and finalize plans – Locate a suitable lot and finalize blueprints.
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Hire contractors – Get bids and hire licensed contractors.
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Apply for loan – Find a lender and complete the application process.
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Loan approval – The lender will order an appraisal and underwrite the loan.
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Initial loan closing – Initial paperwork is signed and the construction loan is secured.
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Begin construction – Break ground and start building once permits are secured.
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Draw loan funds – Request disbursements from lender upon inspection milestones.
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Construction completion – Your home is built and receives a certificate of occupancy.
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Loan conversion – Construction loan converts to permanent financing.
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Final loan closing – You’ll sign paperwork and move into your new home!
The construction phase typically takes 6-12 months, sometimes longer for custom builds. The lender will work closely with you and your contractors throughout the process.
Finding The Best 0 Down Construction Loan Lender
Choosing the right lender is key when seeking a 0 down construction loan. Here are some tips:
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Local and national lenders – Getting quotes from both local and national lenders ensures you find the best rates and terms.
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Portfolio lenders – Smaller lenders that fund loans themselves tend to offer the most 0 down construction loan options.
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Renovation experience – Look for lenders familiar with financing home construction projects.
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VA/USDA approved – For government-backed loans, choose an approved lender.
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Lender reputation – Check reviews and complaints to verify quality service.
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Rates and fees – Compare total costs—don’t just look at interest rates. Origination fees and other charges vary widely.
Getting multiple loan estimates is crucial to finding the best 0 down construction loan for your new home.
Pros And Cons Of 0 Down Construction Loans
Before applying for a 0 down construction loan, weigh the advantages and disadvantages:
Pros
- Zero down payment required
- Custom-built dream home
- Lock in a low, fixed permanent mortgage rate
- Pay interest only on funds used during construction
Cons
- Higher interest rates and fees than conventional loans
- Strict lender qualifications
- Must pay construction loan off in full once home is complete
- Building a home risks budget and timeline overruns
- It takes time and effort to manage the construction process
While certainly not for everyone, 0 down construction loans are an excellent option for motivated individuals who want to build their perfect home but don’t have substantial cash reserves. Do your homework to make sure the numbers add up, and you could end up with the house of your dreams!
Texas Construction loan draws and inspections
The lender allows the builder to take “draws” in stages after routine inspections are made as the home is built. During this phase, the lender sends an inspector, field engineer, or appraiser, to determine if the builder completed a certain milestone. Only then are they allowed to take a draw to pay for materials and sub-contractors. The big part of the funding comes after completion of the home construction. If all goes well and the borrower is satisfied, the builder hands them the key and the new homeowner signs a certificate of occupancy.
Construction Loan Limitations in Texas
There are national construction lenders extending conforming construction loans throughout the country, only requires 5% down payment for a conventional construction loan.
The borrower can use the equity on the land instead of the down payment requirement. There is a 12-month seasoning requirement; if the borrower owned the land for at least 12 months, they could use the appraised value of the property to satisfy the 5% down payment stipulation. However, if the borrower doesn’t meet the seasoning requirement, the lesser of the full acquisition cost vs. the actual land appraised value will be used. A gifted land to the borrower from an immediate family member is allowed.
Can I get a zero down construction loan? Do I need money down?
What is a low down payment on a construction loan?
Down payments vary depending on the particular loan program. For example, their VA construction loan can be as low as 0% down, and their FHA loan can be as low as 3.5% down. Compared to most construction lenders requiring 20% down, Nationwide can offer these low down payment programs at low rates in a combined loan in all 50 states.
Can I get a construction loan with a low credit score?
Prepare your credit and finances. Construction loan interest rates are often higher than the rates for a regular mortgage. While you can get an FHA loan with a relatively low credit score and down payment, a better score and a higher down payment could help you get a lower rate and pay less in mortgage insurance.
Does go mortgage have a low down payment?
GO Mortgage Corporation features low down payment requirements for construction loans with a dedicated lending team to help you through the process. Based in Wisconsin, GO Mortgage started in 1995 and the single close construction loan is its specialty.
Which government loan programs offer a low down payment?
Certain government loan programs, like the Federal Housing Administration’s (FHA) One-Time Close Loan, may offer more flexible lending options. In the case of the FHA program, you may be able to use down payment options as low as 3.5%. The Department of Veterans Affairs’ loan program is another notable exception.