Building your own home can feel like a dream come true. It allows you the flexibility to create the home you want in a location of your choosing.
Moving forward with a new build is a big decision and a big commitment. With a single close construction loan, we simplify the process for you with financing designed specifically to streamline building a new home.
Buying or building a home is an exciting yet challenging process especially when it comes to securing financing. While traditionally buyers had to put down 20% or more for a mortgage 0 down construction loans are now making homeownership more accessible.
As a homebuyer in today’s market, you have more options than ever when it comes to low and no down payment loans. With a 0 down construction loan, you can build the home of your dreams without needing to fork over a large down payment upfront.
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?
- Types of 0 down construction loans
- Pros and cons
- Eligibility and requirements
- The construction loan process
- Finding the best lender
What is a 0 Down Construction Loan?
A 0 down construction loan is a mortgage product that requires no down payment and finances the building of a new home from the ground up.
Unlike a traditional construction loan that typically requires 20-25% down, a 0 down construction loan allows borrowers to finance 100% of the home construction costs. The loan covers the land purchase, construction materials and labor, permits, fees, and other related expenses.
With a 0 down construction loan, buyers can build a custom home without the burden of saving for a large down payment. It makes owning a newly built, customized home possible even if you don’t have tens of thousands in cash readily available.
Types of 0 Down Construction Loans
There are several types of 0 down construction loan programs available, including:
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USDA loans – For low-to-moderate income borrowers in rural areas. Offers 100% financing.
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VA loans – For veterans and active military. No down payment required and no monthly mortgage insurance.
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FHA 203(k) loans – Government-backed loans that finance purchase/rehab projects with only 3.5% down.
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80-10-10 loans – Piggyback loans with 80% first mortgage, 10% second mortgage, 10% down payment.
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Seller-funded down payment loans – The home seller provides the down payment funds through a credit at closing.
Each program has its own eligibility guidelines and requirements. USDA and VA loans are the most commonly used 0 down construction loans.
Pros and Cons of 0 Down Construction Loans
Pros
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Requires no down payment or cash reserves. More affordable for buyers without savings.
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Can build a custom-designed home tailored to your needs.
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Lock in lower fixed interest rate for the construction period and permanent mortgage.
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Single close loans streamline the process with one loan closing.
Cons
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Higher interest rates than traditional mortgages. Usually 0.5 to 1% higher.
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More stringent credit and income requirements. Minimum 620 FICO score.
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Construction delays can increase costs.
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Won’t build as much equity as quickly as with a down payment.
While 0 down construction loans make building a home more accessible, you’ll end up paying more over the life of the loan compared to putting 10-20% down. Carefully weigh the pros and cons when deciding if it’s the right choice.
0 Down Construction Loan Eligibility and Requirements
To qualify for a 0 down construction loan, you’ll need to meet certain criteria:
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Credit score – Minimum 620 FICO score is typical. Some programs accept scores as low as 580. Better scores get better rates.
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Income – Most lenders require minimum annual income around $60,000. Income must be documented.
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Debt-to-income ratio – Your total monthly debt payments, including the future mortgage payment, usually cannot exceed 43% of your gross monthly income.
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Cash reserves – While you don’t need money for a down payment, most lenders want to see 3-6 months of mortgage payments in cash reserves.
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Land – You must own or purchase the land to build on with cash or a land loan.
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Builder – An approved general contractor licensed in your state. Cannot be a DIY build.
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Plans/specs – Detailed blueprints and specifications for the home.
In addition to meeting the above requirements, you’ll go through an extensive approval process providing financial documents, bank statements, tax returns and other paperwork to verify your eligibility. Rates depend on your credit score, income, loan amount, and other factors.
The Construction Loan Process
Here is an overview of the typical construction loan process from application to completion:
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Find land and create plans – Locate a suitable lot and work with an architect on blueprints.
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Select a general contractor – Research and hire a reputable, licensed contractor.
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Apply for loan pre-approval – Get pre-approved with a lender to determine your budget and loan amount.
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Submit plans for appraisal – Provide final plans for the appraiser to estimate value upon completion.
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Close on land purchase – Close on the land either with cash or obtain a land loan.
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Construction loan closing – Review all documents and sign loan closing documents.
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Begin construction – The contractor can now start building once permits are secured!
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Draw process – The lender disburses payment “draws” in stages as work is completed.
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Final inspection – The home must pass all final municipal inspections before signing off.
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Conversion to permanent loan – Single-close loans automatically convert to a traditional mortgage.
The construction phase typically takes 6-12 months but can vary significantly. Work closely with your lender and contractor throughout the building process to ensure everything stays on track.
Finding the Best 0 Down Construction Loan Lender
Choosing the right lender is key to getting your 0 down construction loan approved with the best rates and terms. Here are tips for picking the best 0 down construction loan lender:
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Research local, regional, and national lenders who offer these loans. Credit unions are a good option.
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Compare interest rates, fees, loan terms, credit score requirements. Get multiple loan estimates.
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Look for construction loan expertise and a streamlined application/draw process.
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Choose an established lender with strong customer reviews. Avoid “too good to be true” deals or high pressure.
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Get personalized guidance from a loan officer who can explain the construction loan process.
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Ask about construction cost overrun contingencies in case the budget goes over.
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Look for single close construction-to-perm loans for a simpler process.
While 0 down construction loans make building a home more feasible, they require careful research and planning. Finding the right lender makes navigating the construction loan process much smoother. Partner with an experienced loan officer who can guide you through every step. Soon you’ll be building your dream home with $0 down!
Frequently Asked Questions
What credit score is needed for a 0 down construction loan?
Most lenders require a minimum credit score between 620 to 640. Some may approve scores as low as 580. The higher your credit score, the better rate you’ll get. Aim for at least 680 for the best rates.
Can I be approved for a 0 down construction loan with bad credit or no credit history?
It’s very difficult to get approved for a 0 down construction loan with bad credit (under 620 FICO) or no credit history. These loans are considered high risk so excellent credit is usually required. Taking time to improve your credit can help get approved.
What are the income requirements for 0 down construction loans?
There is no set minimum income, but most lenders want to see enough annual income to comfortably support the future mortgage payments. In general, expect to need a minimum household income of at least $60,000 to qualify.
How much are the interest rates on 0 down construction loans?
Due to the increased risk, 0 down construction loans typically have interest rates 0.5% to 1% higher than rates for traditional 20% down mortgages. Construction loan rates can range from 6% to 8% for borrowers with good credit.
Can I act as my own general contractor with a 0 down construction loan?
No, all 0 down construction loan programs require you to use a licensed general contractor. You cannot obtain this type of financing for an owner-builder construction project.
How much do 0 down construction loans cost overall compared to a regular mortgage?
When you factor in the higher interest rate plus no equity growth from a down payment, a 0 down construction loan will cost significantly more over the life of the mortgage. You could pay hundreds of thousands more in total interest.
What are the disadvantages of using a 0 down construction loan?
The two biggest cons are the higher interest rates which increase total costs as well as less equity and wealth building compared to putting 10-20% down. You also have less wiggle room if construction costs exceed estimates.
How long does the construction loan process take from approval to completion?
The construction phase can range
How Single Close Construction Loans Work
If you’d like to see whether you qualify for a single close construction loan, connect with us. To get you started, we’ve outlined the steps needed and loan programs available to help you understand the process.
Get in touch with us to see if we can start the process to finance the construction of your new home.
- Choose a builder: Find a reputable builder in your area who meets eligibility requirements for financing, including 3 years minimum experience building residential homes, a minimum of $1 million per year in volume, and that their primary business is building residential homes.
- Prepare a contract: We’ll work with you as you prepare a contract with your builder to determine if the home is within your budget and what the cost and timeline will be to build your home and finance it.
- Begin the loan process: Once you review and sign the contract, it will be evaluated by our construction underwriting team. Signing the contract and providing needed documentation usually take only a few days.
- Underwrite the loan: Our underwriting team will evaluate and potentially approve the loan for the construction process, as well as the permanent portion of the loan in one single step.
- Close the loan: With a final review of all the financial information you submitted, including documentation of current income and financial liabilities, you can sign the paperwork to close on your loan and secure financing.
- Begin construction: You’ll begin construction on your new home within 30 days of the closing date. Your construction team will provide you with regular updates on the progress of your home. We’ll manage the construction phase, including ordering draw inspections and any state-required surveys and inspections.
What is a Single Close Construction Loan?
With a single close construction loan, you can finance both the construction of your new home and the long-term mortgage that will be needed to afford your home once it’s built.
This streamlines the process, allowing you to close on your home loan once, rather than having to secure two or more separate loans for the property, construction, and home financing.
You qualify once and have a single appraisal, loan originator, and closing process. This reduces the time it takes to build and move into your new home, protects you from unforeseen circumstances down the road, and saves you from paying double the closing costs.
With other loan options, financing new home construction has been notoriously difficult. Buyers had to find a way to finance the land, construction project, and home. In many cases, this required getting two or three loans.
Home construction is complicated and requires many moving parts. Single close construction loans are made to help simplify the process.
Qualifying for a one-time close construction loan is no more complicated than qualifying for a conventional home loan, depending on your overall financial health and risk level.