How Much Are Closing Costs on a Construction Loan?

If you’re building a new home from the ground up, you’ll need a construction loan to finance the building process. Construction loans have unique closing costs that are important to understand and budget for.

On a typical construction loan, you can expect to pay closing costs ranging from 2% to 5% of your total construction budget. For a $300,000 build, that means total closing costs of $6,000 to $15,000.

Let’s take a closer look at what’s included in construction loan closing costs and strategies for reducing them.

Typical Closing Costs on a Construction Loan

Construction loan closing costs generally fall into three main categories

Loan origination fees – Charges from the lender for processing, underwriting, and funding the loan. May include application fees, underwriting fees, and funding fees. Often 1% to 2% of the loan amount.

Third-party fees – Fees paid to outside companies involved in the transaction, like appraisal, credit report, title search, and survey fees.

Prepaid interest – Interest you pay at closing to cover the first month or two before regular payments begin Depends on your draw schedule

You’ll also have to pay property taxes and insurance premiums for the land upfront at closing.

Here’s a breakdown of common closing costs on a construction loan:

• Loan origination fee – 1% to 2% of loan amount
• Appraisal fee – $300 to $600
• Credit report fee – $25 to $50
• Title search fees – $500 to $1000
• Survey fee – $300 to $500
• Attorney fees – $500 to $1500
• Recording fees – $50 to $150
• Prepaid property taxes – Varies
• Prepaid homeowners insurance – Varies
• Prepaid interest – Varies
• Inspection fees – $300 to $500
• Permits – Varies by project
• Lender title insurance – $500 to $2000

Total closing costs – Roughly $6.000 to $15000 on a $300000 construction loan

Closing costs can vary widely based on your specific loan program, lender, and project details. Get a detailed Loan Estimate from multiple lenders to compare options.

Ways to Reduce Closing Costs

While closing costs are a necessary part of securing financing, here are some tips to keep them as low as possible:

• Shop around – Compare Loan Estimates from several lenders to find the best rates and lowest fees. Local banks and credit unions may offer discounts.

• Negotiate – Once you choose a lender, ask them to match or beat competitors’ fees. Most are willing to negotiate, especially for qualified borrowers.

• Use seller credits – If you purchased land, ask the seller to credit a portion of the purchase price back to you at closing to cover fees.

• Pay discount points – Paying points upfront can lower your interest rate over the life of the loan, potentially saving thousands.

• Lower your rate – Paying a slightly higher rate can reduce lender origination fees. Do the math to see if it saves overall.

• Time closings together – If possible, close on land and construction loan simultaneously to avoid duplication of third-party fees.

• Waive escrows – Pay property taxes and insurance separately instead of setting up escrow accounts.

Closing Cost Calculator for Construction Loans

To get a more tailored estimate of construction loan closing costs based on your project details, use this closing cost calculator:

Loan amount: Enter your total construction loan amount. This covers land purchase and construction costs.

Interest rate: Enter your estimated construction loan rate. Rates are often variable during the build stage.

Loan term: Enter the length of the initial construction period interest-only payments, typically 6-12 months.

Location: Enter your state and county to customize third-party fees. Urban areas are often higher.

With these inputs, the calculator will provide an estimated range for your origination, third-party, and prepaid interest closing costs.

This gives you a rough idea of how much cash to have on hand. Be sure to discuss all fees in detail with your lender as well.

Closing Costs on Construction-to-Permanent Loans

Many construction loans automatically convert to a permanent mortgage once building is complete. This is known as a construction-to-permanent or end loan.

On these streamlined loans, you’ll pay two rounds of closing costs:

• Initial closing – Covers construction loan costs
• Final closing – Covers fees to convert to your permanent mortgage

By combining everything into one loan upfront, you avoid the hassle of reapplying for a mortgage after the build. And in some cases, lenders may offer discounts on the final permanent loan costs.

Just be aware you must pay both closings, so factor this into your total budget.

Put Closing Costs in Your Budget

As you can see, closing costs make up a significant chunk of your overall construction loan expenditure. Make sure you account for these fees in your building budget.

Aim to have at least 10% to 15% available for total closing costs and unexpected overages that come up during building. This ensures you don’t run short on cash before finishing your new home.

And be sure to shop around with multiple lenders to get the best rate and lowest fees possible. This helps maximize your available funds for constructing your dream home.

With some savvy planning and research upfront, you can successfully navigate the closing process for your construction loan and begin building your ideal home.

Key Takeaways on Construction Loan Closing Costs

• Typical closing costs range from 2% to 5% of the total construction loan amount.

• Major fees include origination, third-party, and prepaid interest charges.

• Shop around with various lenders to get the lowest rates and fees.

• Negotiate with the lender to reduce any excessive fees in your Loan Estimate.

• Calculate an estimated range using an online closing cost calculator.

• Have 10% to 15% extra budgeted beyond your construction costs to cover closing and overages.

• Expect to pay closing costs twice on a construction-to-permanent loan.

Understanding construction loan closing costs can help you create a realistic budget and minimize financial surprises as you undertake your new home build.