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Building your dream home is an exciting endeavor, but it can also be daunting when you don’t have a lot of money for a down payment. That’s where low money down construction loans come in! These specialized loans allow you to put as little as 3% down while still getting the financing you need to build a custom home.
In this article, we’ll walk through everything you need to know about low down payment construction loans, including:
- What are low down payment construction loans?
- What are the benefits?
- What are the requirements?
- What types of low down payment construction loans are available?
- Tips for getting approved
- The best lenders for low down payment construction loans
Let’s get started!
What Are Low Down Payment Construction Loans?
Traditional construction loans typically require a down payment of 20-25% of the total cost of building a home. But with a low down payment construction loan you may only need to put down 3-10% of the home’s value.
These loans are designed for people who want to build a new home but don’t have tens of thousands of dollars on hand for a standard construction loan down payment. They make home building more accessible for first-time and move-up buyers alike.
Low down payment construction loans function similarly to a traditional construction loan. The lender provides financing in stages to cover the costs of land purchase, materials, labor, fees, and other construction expenses. You only pay interest on the amount disbursed so far.
Once construction is complete, the loan converts to a permanent mortgage. This is called a construction-to-permanent loan or a single-close loan. With low down payment versions, you’ll just put 3-10% down at closing instead of 20% or more.
Benefits of Low Down Payment Construction Loans
There are many advantages to low down payment construction loans:
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Lower barrier to entry: Only needing 3-10% down makes building a custom home achievable if you don’t have tens of thousands in cash saved up.
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Build your perfect home: With construction financing, you can work with a builder to customize a home to your specifications.
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Potentially lower interest rate: Construction loans may offer lower rates than a traditional mortgage.
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Only pay interest on disbursed funds: Your monthly payments during construction are lower than they would be with a traditional mortgage.
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One-time close: The loan converts to a permanent mortgage automatically with no need to requalify or close again.
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Shorter loan term: Construction loans are shorter-term, usually around 12 months, so you pay less interest over time.
Clearly, low down payment construction loans open doors for many hopeful home builders!
Requirements for Low Down Payment Construction Loans
While low down payment construction loans are more accessible, lenders still have eligibility requirements you must meet:
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Credit score: Most lenders look for a minimum credit score around 640-680. Higher scores unlock better rates and terms.
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Down payment: Low down payment construction loans require around 3-10% down. Specific minimums depend on the lender and loan type.
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Debt-to-income ratio: Lenders want to see your total monthly debt payments are no more than 43-45% of your gross monthly income.
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Loan-to-value ratio: This calculates how much you’re borrowing versus the home’s value. It may need to be 80-90% or lower.
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Cash reserves: Expect to show reserves equal to 3-12 months of mortgage payments. More reserves help your case.
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Land equity: If you already own the land, you may need 20% equity in it to qualify for financing.
Meeting these requirements demonstrates you can afford the mortgage payments once construction is complete. Having a reputable builder lined up is also key.
Types of Low Down Payment Construction Loans
Many lenders offer construction loans with low down payments. Let’s look at some of the most common options:
FHA 203(k) Loan
This FHA loan covers purchasing a home and financing renovations or repairs with one mortgage. You can do a limited 203(k) with a 3.5% down payment if renovations are under $35,000. Or you can get a standard 203(k) for more extensive work with just 3.5% down.
VA Construction Loan
For veterans and service members, VA construction loans allow 0-5% down payments. Closing costs can also be rolled into the loan. The VA guarantees the loan, making it low-risk for lenders.
USDA Construction Loan
In rural areas, the USDA backs construction loans with 0% down payment options for low-income buyers. These loans are issued by private lenders but guaranteed by the USDA. Grants may also be available to supplement the financing.
Conventional 97 Loan
While not as common, some lenders offer conventional construction loans with just 3% down. These have less restrictive credit requirements than government-backed options but may come with higher rates or fees.
Builder Incentives
Many home builders now offer financing incentives if you use their approved lenders and pre-selected home designs. Look for builders advertising $0 down, discounted rates, or waived fees to lower costs.
Tips for Getting Approved
If you want the green light for a low down payment construction loan, aim to:
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Boost your credit score: Pay down balances, dispute errors, and don’t apply for new credit ahead of your application.
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Save up cash reserves: Tap your savings to bulk up the amount you have on hand for closing costs and mortgage payments during construction.
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Lower your DTI: Reduce monthly debts and secured new income ahead of applying to improve this key ratio.
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Get prequalified: Work with a lender to get prequalified and have them review your finances before formally applying.
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Know the closing timelines: Construction loans can take 30-60 days to close. Plan ahead so you’re ready.
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Research lenders: Compare offers from multiple lenders to find the best rates and terms.
The Best Lenders for Low Down Payment Construction Loans
The lender you choose can make or break your experience getting a low down payment construction loan. Here are some top options based on down payments required, customer satisfaction, and reputation:
Movement Mortgage
- Down payments as low as 3%
- One of the fastest closing times in the industry
- Digital applications for smooth process
New American Funding
- 3% down payment conventional construction loans
- Low interest rates with minimal fees
- Options for bad credit borrowers
Navy Federal Credit Union
- 100% financing available to members
- closing costs can be financed
- Streamlined preapproval process
Guaranteed Rate
- Down payments from 3%
- Online applications and rate quotes
- Renovation loan options like FHA 203(k)
Wells Fargo
- As low as 3-5% down payment on conventional loans
- Extensive renovation and new construction options
- Grant program for down payment assistance
Finding the right low down payment construction loan takes research, preparation, and a trusted lender partner. But the payoff is getting to build your dream home even if you don’t have a large down payment saved up yet. The programs and lenders highlighted above can make low down payment financing a reality.
With smart planning and perseverance, you can join the many Americans who build new homes each year. So get excited about bringing your vision to life and start exploring low down payment construction loans today!
FHA construction loan requirements
The qualifying requirements for an FHA construction loan are similar to those for standard FHA loans, but with a few additions.
To qualify for any FHA loan, you’ll need to meet the following criteria, at minimum:
- Credit score: At least 580, or as low as 500 if putting down at least 10 percent
- Debt-to-income (DTI) ratio: No more than 43 percent (with some exceptions)
- Down payment: 3.5 percent with a credit score of at least 580, or at least 10 percent with a credit score between 500 and 579
- Loan limits: No more than the FHA loan limits for the year; for 203(k) loans, no more than the FHA loan limits, the home’s after-renovation value plus improvement costs or the home’s after-renovation value, whichever is less
- Mortgage insurance: Upfront and annual FHA mortgage insurance premiums, paid for the life of the loan in most cases
- Occupancy: Primary residences only
On top of these requirements, FHA construction loans require satisfactory documentation detailing the construction or renovation project, including information about the contractor you plan to work with. For a standard 203(k) loan, you’ll be assigned a 203(k) consultant to estimate the remodeling or repair costs.
Whether you get a construction-to-permanent or rehab loan, the work will also be subject to inspection as the project progresses.
How does a construction loan work? Construction loans aren’t like regular mortgages. They typically last for one year, during which time the lender releases payments, usually directly to your contractor. The lender enlists an inspector to evaluate the project at various stages, and releases more funds once everything checks out. Once construction is finished, the loan either converts to a traditional mortgage or the borrower obtains a mortgage to pay it off.
- FHA construction-to-permanent loan: An FHA construction-to-permanent loan finances the ground-up construction of a home — including the purchase of the land or lot — then converts to a regular FHA mortgage. This is also known as a one-time or single-close loan; you won’t have to pay closing costs for two separate loans.
- FHA 203(k) rehab loan: An FHA 203(k) loan finances the cost of buying an existing home plus renovations and repairs. There are two types of 203(k) loans: a standard 203(k) for renovations costing $35,000 or more; and a limited 203(k) for smaller-scale, less expensive projects. Either option allows you to obtain one loan to buy and fix up a home, instead of two loans.
Can I get a zero down construction loan? Do I need money down?
FAQ
What is the lowest down payment for a construction loan?
What is the lowest credit score for a construction loan?
Are construction loans difficult to get?
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.
How much down payment do you need for a construction loan?
Borrowers usually are required to make a down payment of at least 20% when taking out a construction loan. However, many lenders require more—between 25% and 30% of the total construction costs. The requirement varies by lender, but if you make a down payment of less than 20% you may have to pay private mortgage insurance (PMI).
Does nationwide offer a low down payment construction loan?
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. If you’re looking for a construction loan and have less than stellar credit, FMC Lending is a great option, featuring fast funding and no minimum credit score requirements.
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.