Building a home can be expensive. And taking out both a construction loan and primary mortgage to finance this can be challenging. Fortunately, a USDA construction loan can help with both problems. These loans require no down payment, and youâll only need to close one loan to finance both the construction of your residence and the home itself. There is one drawback, though: You must build a home in what the U.S. Department of Agriculture (USDA) considers a rural area.
Building your dream home can be an exciting yet daunting process, especially when it comes to financing Many people assume they need a large down payment to qualify for a construction loan, but that’s not always the case No money down construction loans are possible with the right lender and loan program.
In this comprehensive guide, I’ll walk you through everything you need to know about getting a no money down construction loan in 2024.
What is a No Money Down Construction Loan?
A no money down construction loan is exactly what it sounds like – a loan that covers 100% of construction costs so you don’t have to put any money down. This type of financing can be an ideal option for borrowers who want to build a home but don’t have the cash for a down payment.
With a no money down construction loan, the lender finances the entire appraised value of the home So if the home is appraised at $300,000, the lender provides a loan for the full $300,000
Benefits of a No Money Down Construction Loan
There are several benefits to getting a no money down construction loan:
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No large cash outlay needed: The main appeal is not having to put thousands of dollars down to start building. This removes a major barrier for many borrowers.
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Maximize cash flow: Without a down payment tying up your cash, you can use those funds for other purposes while your home is being built.
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Build your dream home: No down payment construction loans make it possible to build a custom home suited to your needs and preferences.
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Potentially lower interest rate: Some no money down construction loans have lower interest rates than conventional mortgages.
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One loan for everything: The construction loan covers all costs – land, materials, labor, fees, etc. There’s no need to shop for multiple loans.
Loan Programs for No Money Down Construction Loans
Very few lenders offer true 100% financing on construction loans. To qualify for no money down, you’ll likely need to use a special mortgage loan program:
FHA One-Time Close Construction Loan
This FHA-insured loan covers construction costs and the permanent mortgage in a single transaction. It requires just a 3.5% down payment, allowing borrowers to put no money down if the land is already owned or gifted. Max loan amount is $331,760 for a single-family home in most U.S. counties.
VA Construction Loan
For eligible veterans and service members, the VA loan program offers 100% financing with no down payment required. There are no maximum loan limits under VA guidelines. Credit scores as low as 580 may qualify.
USDA Single Close Construction Loan
In designated rural areas, the USDA Single Close loan can finance site acquisition, construction, and the permanent mortgage in one loan. No down payment is required and credit scores as low as 640 may be approved. Loan limits up to $349,850 depending on location.
As you can see, government-backed loans offer the best terms and easiest qualifications for no money down construction financing. Conventional lenders typically require at least 10-20% down to initiate construction.
Qualifying for a No Money Down Construction Loan
While zero down payment construction loans remove the cash requirement, you still must meet certain criteria to get approved and receive the best rates:
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Credit score: Each lender sets minimum score requirements, but you’ll likely need 620-680 for the best terms. The higher the better.
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Income/employment: Proof of stable income is required to qualify for the monthly payments. Most lenders want at least 2 years of employment history.
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Debt-to-income ratio: Your total monthly debt payments, including the future mortgage payment, should not exceed 43-50% of your gross monthly income depending on the program.
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Loan-to-value ratio: Some lenders limit how much you can borrow relative to the appraised home value.Aim for LTV of 95% or lower.
Meeting these requirements demonstrates you can afford the mortgage payment once construction is complete. Having a steady job and good credit score improves your chances of approval.
How Do No Money Down Construction Loans Work?
Zero down payment construction loans follow a similar process as regular construction loans, just without any money required upfront:
- Get pre-approved – Confirm you qualify and pick a lender
- Find land – The lender will appraise the land and determine loan amount
- Finalize building plans – Complete blueprints and pick a contractor
- Close on the construction loan – Loan funds will be held in escrow
- Payments disbursed during building phase – As work is completed in stages
- Construction completes – Loan converts to permanent mortgage
The loan disbursements are managed by the lender to ensure the project stays on time and on budget. You’ll work closely with the lender throughout the building phase.
Tips for Getting Approved
If you want the best shot at getting approved for a no money down construction loan, keep these tips in mind:
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Have a down payment saved as a backup plan in case you don’t qualify for 0% down. Even 3-5% down provides more options.
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Get pre-approved before searching for land or making offers. This shows sellers you can obtain financing.
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Shop multiple lenders to compare rates and fees. Government-backed loans often have the lowest costs.
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Ask about construction loan qualifications upfront. Lenders have varying requirements.
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Improve your credit score before applying. Scores above 700 get the most competitive rates.
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Reduce your debt-to-income ratio by paying down debts. This gives you more wiggle room for the mortgage.
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Pick reputable builders and stick to realistic building plans. Unique homes can be harder to appraise.
Following these tips sets you up for success when applying for a zero down payment construction loan and improves your chances of approval.
Alternatives to No Money Down Construction Loans
If you don’t qualify for a no money down construction loan, don’t give up! You still have options to build your dream home:
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Reduce costs with sweat equity: Take on some of the construction labor yourself to reduce the total loan amount required.
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Use liquid assets: Cash out investments to use for the down payment if you have substantial savings or stocks.
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Leverage land equity: If you already own the land, the equity can cover the down payment in many cases.
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Explore down payment assistance: Look into nonprofit and government grants/loans to assist with the down payment.
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Get a business partner: Bringing in a partner to share costs and qualify jointly can improve mortgage eligibility.
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Borrow from family: See if any relatives would be willing to gift funds or privately finance part of the construction costs.
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Compromise on the design: Scale back the plans to lower the build price and required mortgage amount.
Don’t let a down payment hold you back from building your dream home. With the right lender, loan program, and preparation, you can obtain the financing needed to start construction with little money out of pocket. Do your homework, improve your financial profile, and explore all your options. The keys are out there!
See What You Qualify For
As with all mortgage types, there are both advantages and disadvantages to using a USDA construction loan.
USDA Construction Loan Requirements
Ready to apply for a USDA construction loan? Make sure, first, that you meet these requirements:
The USDA requires that the home you are building meets several conditions:
- The property must be your primary residence. You are not allowed to use a USDA construction loan to build an investment property or a vacation home.
- The home you build must be in an area that the USDA considers rural. To find out if the area in which you want to build qualifies as rural, use this USDA property look-up tool.
- You must work with a contractor approved by the USDA to build your home.
You must also meet certain credit and income requirements to qualify for a USDA construction loan:
- You will usually need a minimum FICO® credit score of 640 to qualify.
- Your debt-to-income ratio (DTI) must be less than or equal to 41%.
- Your total income canât exceed the USDAâs income limit requirements. These limits will vary depending on where you live, with the income limit higher in higher-cost counties. But in most counties, one- to four-member households can only earn up to $103,500 and five- to eight-member households up to $136,600 a year and still qualify for a standard USDA loan. To determine the income limit in your county, use this USDA income look-up tool.
Construction Loan With No 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 credit score do you need for a Wells Fargo construction loan?
Can you get a construction loan with no down payment?
Your down payment will vary by loan type. You may be able to put down 5% on a conventional mortgage, but a construction loan could call for at least 20% upfront. Also, ask your lender how to get a construction loan with no money down. Down payments for FHA loans start at 3.5%, and you might not need a down payment on USDA and VA loans.
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).
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 money do you need for a construction loan?
You should have enough income to cover payments on your current debts and the new construction loan. Lenders typically require a DTI ratio no higher than 45% for construction loans. Down payment of at least 20%. Borrowers typically need a down payment of at least 20% for a construction loan, but this can vary by lender.
Should you take out a construction loan?
When you take out a construction loan, you’ll usually make interest-only payments while the construction is being completed. Construction loans also tend to have higher interest rates than most home loans because they are considered to be more risky for lenders. New episodes every other week.
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.