Getting a construction loan to build your dream home can be an exciting yet daunting process One of the biggest obstacles for many hopeful homeowners is coming up with the down payment, which is traditionally 20% of the total cost of construction. This can amount to tens or even hundreds of thousands of dollars.
Thankfully, there are construction loan options that require little or no money down Called “zero down construction loans”, these loans make building a custom home more accessible for regular people
In this comprehensive guide. we’ll explain everything you need to know about zero down construction loans including
- What is a zero down construction loan?
- pros and cons
- Types of zero down construction loans
- Tips for getting approved
- The best lenders for zero down construction loans
What is a Zero Down Construction Loan?
A zero down construction loan is simply a construction loan that does not require a down payment. The lender finances 100% of the home’s construction cost, allowing the borrower to build their dream home without paying anything upfront.
With a traditional 20% down construction loan, borrowers must provide 20% of the total construction costs upfront as a down payment. On a $300,000 build, that would mean saving $60,000 before applying for the loan. For many, this large cash requirement prevents them from building a custom home.
Zero down construction loans remove the barrier of the down payment, making custom home construction more feasible for the average homebuyer.
Pros of Zero Down Construction Loans
1. Require No Down Payment
The main appeal of zero down construction loans is obvious – you don’t have to save up tens of thousands of dollars for a downpayment before building your home. For many prospective homeowners, saving 20% of construction costs is unrealistic. Zero down loans allow you to start building right away.
2. Improve Cash Flow
Putting zero money down upfront means you get to hang onto your cash. Rather than tying up savings in home equity, you can use those funds for other purposes. This can help maintain a healthy cash flow.
3. Allow for Dream Home Construction Sooner
For those who don’t want to spend years saving up for a large down payment, zero down loans make building a custom home possible right now rather than years down the road. You can start on your dream home without delay.
4. Lower Monthly Payments
While zero down loans do incur higher interest rates, putting zero down often results in lower monthly payments compared to a loan with 20% down. This improves short term cash flow.
Cons of Zero Down Construction Loans
1. Higher Interest Rates
The main tradeoff of zero down construction loans is higher interest rates. Since the loan is riskier for the lender with no down payment buffer, rates are usually 0.5 to 1 percentage point higher than a loan with 20% down. Over the life of a 30 year mortgage, that can add tens of thousands in interest costs.
2. Require mortgage insurance
Zero down construction loans require what’s called private mortgage insurance, an additional policy to protect the lender from default. This can cost 0.5% to 1% of the total loan amount annually. On a $300,000 home, that’s an extra $1,500 to $3,000 per year.
3. Stricter approval criteria
Because zero down loans are riskier, lenders have more strict approval standards. You’ll need a good credit score, stable income, and limited debt. Approval is harder compared to a standard construction loan.
Types of Zero Down Construction loans
There are a few types of zero down construction loan programs:
VA Loans – Offered by private lenders but backed by the Department of Veterans Affairs, VA loans offer 100% financing to eligible veterans and require no downpayment.
USDA Loans – For building in designated rural areas, USDA-backed loans offer 100% financing with no down payment requirement. Credit and income requirements are also more flexible.
203(k) Loans – FHA-insured loans that provide 100% financing on combined purchase/construction of a home. Downpayments are not required but closing costs apply. Credit score and income minimums must be met.
Portfolio Loans – Loans offered directly by banks and credit unions that may offer special zero down programs, particularly for existing customers.
Hard Money Loans – Loans from private investors and companies that will lend to borrowers with credit challenges. Higher rates and stricter terms often apply.
Tips for Getting Approved for a Zero Down Construction Loan
Because zero down construction loans are riskier for lenders, getting approved can be more challenging than a typical loan. Here are some tips for improving your chances:
-
Have a good credit score – Aim for a score of at least 720 or higher. This saves you thousands on rates.
-
Lower your debt – Pay down credit cards, auto loans, student loans, and other debts to reduce your debt-to-income ratio.
-
Save up for closing costs – While you can finance closing costs, paying them upfront improves your chances. Save around 3-5%.
-
Put back up savings – Even with zero down, lenders want to see you have 3-6 months of mortgage payments saved as a reserve.
-
Get pre-approved – Having a pre-approval letter shows lenders you are qualified.
Best Zero Down Construction Loan Lenders
We evaluated dozens of construction lenders and found these to be the best for zero down construction loans:
Lender – Veterans United Home Loans
Down Payment – 0% for veterans
Why We Chose It – Specializes in VA loans with great rates and 100% financing. Quick approvals and excellent customer service.
Lender – New American Funding
Down Payment – 3% with DPA grants
Why We Chose It – Offers multiple down payment assistance programs to get financing with only 3% down. Wide product selection.
Lender – Guild Mortgage Company
Down Payment – 0% with USDA loan
Why We Chose It – Top lender for USDA construction lending, providing zero down payment options in eligible rural areas. Local experts help guide you through building.
The Bottom Line
Zero down construction loans allow you to build the home of your dreams without handing over a large chunk of money upfront. While you’ll have higher rates and costs compared to a traditional loan, zero down financing makes custom construction more accessible. Do your homework, improve your finances, and find the right lender willing to say “yes” to your zero down construction loan.
Choose a Loan Typelearn more
The FHA One-Time Close Loan is a secure, government-backed mortgage program available for one-unit, stick-built primary residences, new manufactured housing for primary residences (excludes single wide mobile homes), and modular homes.
It allows borrowers to finance for the construction, lot purchase (if necessary), and permanent loan into a single mortgage. It provides for a single all-at-once closing with a minimum down payment of 3.5 percent (up to your FHA county lending limit).
The One-Time Close Loan gives buyers a new option — a single loan with one single closing date, and a defined set of parameters for how the loan is to proceed during the construction phase and beyond.
Most construction loans require two separate closings—once to qualify for the construction itself, and again when converting into a permanent mortgage. The One-Time Close Loan gives buyers a new option.RELATED ARTICLES
Many potential borrowers arent aware that they have the option of building their dream home as a part of a single, consolidated home loan. The FHA One-Time Close Loan offers them a number of advantages in doing so.
Homebuyers can also take advantage of the FHA’s lenient qualifications, such as easy credit qualifying for scores, more flexible guidelines for homebuyers’ work histories, small escrow reserve requirements, and debt-to-income ratios up to 50 percent.RELATED ARTICLES
The FHA Construction-to-Permanent program helps contractors with a smooth, start-to-finish process that allows consumers to purchase and build a home according to their liking, all in a single mortgage.
Sellers and builders can make contributions of up to 6 percent toward the homebuyer’s closing costs and prepaid items. Any contribution funds beyond that are reduced, dollar-for-dollar, from the loan amount.RELATED ARTICLES
If you already own a plot of land on which you intend to build a home, you are a step ahead in the process. Your land equity will cover the 3.5% down payment requirement for an FHA One-Time Close loan.
The most important step in building a home on your own lot is selecting the contractor. A licensed general contractor has a wealth of knowledge and is going to be your best resource in selecting the land to build on, giving you floorplan options, and guiding you in making the best decisions.RELATED ARTICLES
FHA Loan Programs for 2024
The most recognized 3.5% down payment mortgage in the country. Affordable payments w/good credit.
– Improving Your Credit Score Has Never Been More Important -FHA.com is a privately owned website, is not a government agency, and does not make 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?
Is a construction loan harder to get than a mortgage?
What is the minimum FICO score for a construction loan?
Is it difficult to get a loan to build a house?
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.
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.
How much down payment do you need for a construction loan?
Usually, a minimum 20% down payment is required, and a 25% down payment requirement is not uncommon. In addition, most construction loans require a minimum credit rating of 620, if not higher. Can I use any excess funds for home furnishings?
Can you get a construction loan without a down payment?
If you want to get a construction loan without having to make a down payment, you can apply for a U.S. Department of Agriculture (USDA) or Veterans Affairs (VA) construction loan. The USDA construction loan is ideal if you want to build in a USDA-eligible rural area.