How To Get A Construction Loan With No Money Down?

Looking to build your dream home? Learn how to get a construction loan with no down payment and make your dreams a reality. This expert guide has you covered.

The way mortgages work is relatively straightforward: you pick a house you like, you borrow money from the mortgage lender, you buy the house, and you pay your mortgage loan (with interest) every month.

Construction loans work differently. The nature of the loan is the same, but the purpose of obtaining it differs. Let’s see what construction loans are and how they work.

What is a Construction Loan?

Construction loan
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A construction loan is handed out to bear the construction cost of a house, whereas a mortgage loan is given to buy an already existing place, and a construction loan is given to build a property and everything needed with it, such as a garage, patio, basic building structure, etc.

A construction loan is a short-term loan used to buy land or build your own property. These could also be granted for the renovation of an existing property, but it depends on the kind of loan you’re given. During the construction phase of the loan, you only make interest-only payments or no payments at all based on your outstanding loan balance.

Since these are short-term loans, they end within the first year of borrowing. The interest rate is higher than that of a traditional loan, so it’s better to pay it off and end it early.

What are the requirements for a Construction Loan?

Construction loan requirements
Image Source: BONE Structure

Just like any other loan, there are certain requirements that a borrower must fulfill in order to obtain a construction loan.

Credit Score: A credit score is something you obtain over time; this is like a measurement metric that ensures lenders that you’ve had a good loan repayment history, so you’re less likely to default on the loan. For construction loans, the credit requirement is at least 680 score points. If your score is higher than this, you can expect flexible terms and conditions of the policy.

Debt-to-income Ratio: Another measurement metric that most lenders use is the debt-to-income ratio, which tells how much income you have and how much debt you already pay against that income. To qualify for the construction loan, the ratio should be less than 45%.

Cash Reserves: Lenders usually require you to pay a downpayment of 20%-30% on the original loan, so they will also require you to have enough cash reserves not only for a downpayment but also to repay the loan back.

Latest Documents: With every requirement, the borrower is required to send in the latest documents of their tax history, bank statement, insurance payments, sources of income etc. Make sure everything is up-to-date so that you have a better chance of getting the loan.

How to get a Construction Loan with no money down?

Construction loan with no money down
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For many people, the biggest obstacle to buying a new home is the down payment. Most traditional lenders require a 20% down payment, which can add up to tens of thousands of dollars. However, there are government agency programs that lenders can use to qualify borrowers for lower down payments. The VA and USDA loans are two of the most popular programs. VA loans are available to veterans and their families, while USDA loans are available to rural homeowners. Both programs allow lenders to qualify borrowers for 0% down. As a result, these programs can make home ownership more affordable for people who might otherwise be priced out of the market.

It is possible to get a construction loan if you have no money down if you can cover the purchase price. You can also look for grants or down payment financing of 100%; this way, the borrower also doesn’t need to pay the insurance cost and additional fees.

With the right amount of strategy, the borrower can qualify for a loan even if they have no money down; for this, you will have to take expert advice or hire a real estate agent to guide you through the process and make it a win for you.

However, it still depends on every case whether your case is strong enough to qualify. Be prepared for disappointments, but also make sure you have a contingency plan in action, like the option of going to another lender if possible.

Comparing The Best Construction Loan Providers Of 2023

Company Starting Interest Rate Minimum Credit Score Loan Terms (range) Maximum Loan Amount
Nationwide Home Loans Group

(Best Overall)

Varies 640 Varies $3,000,000+ on VA loan options
FMC Lending  (Best for bad credit score) Varies None Varies Varies
Nationwide Home Loans, Inc.
(Best for first-time buyers)
Varies Varies Varies Varies
Normandy
(Best online borrower experience)
Varies Varies Varies $3000,000
Go Mortgage Corporation
(Best for low down payments)
Varies 640 to 680 30 years Varies
TD Bank
(Best for flexible use construction)
Varies Varies 30 years Varies
VA Nationwide
(Home loans that are best for veterans)
Varies 640 Varies $3,000,000+ on VA loan options

 

5 Percent Down Construction Loan

A construction loan with only a 5% downpayment looks like a dream, but it is not applicable in most situations. When a loan is applied for, the lender scrutinizes the application and notifies them if the applicant qualifies.

For qualified applicants, a minimum down payment of 5% is required if the purchase price is under $510,400 (certain programs may allow for a minimum down payment as low as 3%). With a 5% down payment, you will have a single permanent loan with mortgage insurance at 95%.

Construction Loan Calculator

Construction loan calculator
Image Source: Hard Money Lender

Jumping into the market looking for a lender and a construction loan isn’t a smart decision unless you’ve done all the research you need. And part of that research is having a close estimate of the finances you will spend.

For this, there are a couple of Construction Loan Calculators online that help you get a figure. They ask quick questions like whether you’re looking to purchase or refinance the property and how much it is going to cost, then comes the loan information such as the interest rate and duration of the loan etc.

What Are Some Of The Down Payment Requirements For Government-Backed Construction Loans?

To qualify for Government-backed construction loans, extensive paperwork and screening are required. But the down payment requirements are quite minimal. To evaluate your options refer to the following table.

Government-Backed Loan Minimum Down Payment Details
 

FHA construction to permanent -loan

 

3.5%

FHA construction loans are appropriate for self-occupied properties. If you have a minimum credit score of 580, an FHA-approved lender will require a down payment of 3.5%. However, if your FICO score falls between 500–579, you must make arrangements for a down payment of 10%.

 

To qualify for FHA loans, you need to

 

●       Have a low DTI ratio (43% or less)

●       Borrow within the latest FHA cap

●       Work with FHA-approved contractors and consultants

●       Commit to mortgage insurance payments

 

 

VA construction loan

 

 

0%

VA loans provide a practical alternative for qualifying veterans or service members.

The eligibility criteria include

 

●       A credit score of 620+

●       DTI ratio of 45% to 50%.

 

In addition, you must provide evidence of your income and collaborate with builders registered with the VA to secure the loan. The funding fees are affected by the down payment amount you provide. The following is the fee obligations for different down payment ranges:

 

●       Below 5%2.3%

●       5%-10%1.65%

●       10% or more1.4%

USDA combination construction to permanent loan 0% Fully financed primary residence homes in designated rural regions can be constructed using USDA loans. The following criteria are required for eligibility:

 

●       Credit score of 640+

●       DTI ratio of 41% or lower

●       Income with USDA limits.

 

Although mortgage insurance is not mandatory, you must partner with a contractor approved by USDA and obtain a new construction warranty.

Is it hard to get a Construction Loan?

This is rather a relative term because it is difficult to get a construction loan if you’re a high-risk borrower or someone with a very low income. Since construction loans are short-term and flexible, they usually have a high-interest rate and ask for a credit score of at least 680 points. In such a case, it could be hard to get a loan.

If you’re someone who needs it and is sure enough to pay it back, on time, the lender can see through you. This makes it so much easier for you to qualify for a construction loan, or any loan for that matter.

It depends on how much money you need and whether you will be able to pay it back, including interest. Even though a short term loan, the interest rate can spike up your monthly payment, making it super hard for you to pay back. So make sure you know what you’re getting yourself into.

It is advisable to shop around for more options and lenders because the cost of insurance and lenders may vary. For you to find the best one, you need to search the market and filter the lenders that best suit your needs.

FAQs

Image Source: Gorgias
Image Source: Gorgias

What FICO score is needed for a construction loan?

The necessary FICO score for a construction loan is dependent on the lender, but typically, a minimum score of 540 is required, with a preference for a higher score. The probability of approval increases with a higher credit score. However, certain construction loan lenders, like FMC Lending, do not impose a minimum credit score requirement.

What are construction loan interest rates for 2023?

The interest rate ranges vary depending on whether the construction loan only finances the construction period or if it is a combined single-close loan that combines both the construction and permanent mortgage. The construction-only loan is considered to be slightly riskier, with interest rates ranging from 5% to 10%. These rates are generally at least 5% higher than the traditional permanent mortgage rates used to purchase an existing home.

How do I get financed for construction?

Before applying, it is essential to ensure that your finances are in order. This involves improving your credit score, if required, and setting aside savings for the down payment and closing fees. When you’re prepared, you must organize your documentation and have it available while applying for financing, along with a detailed budget and timeline.

What are the most common construction loans?

Various types of construction loans are available, such as construction-to-permanent, construction-only, renovation, owner-builder, and end loans. Among consumers, construction-to-permanent loans are the most prevalent and well-liked type of construction loan.

How do I draw money from my construction loans?

It is important to ask your lender about the disbursement process for your loan amount. While some lenders allow for monthly draws, others may only authorize a draw after a passed inspection. You should also inquire about any necessary documentation or process required to withdraw money from your construction loan to pay the bills as they come in. Understanding this process and ensuring that your constructor does as well can help avoid delays due to insufficient funds.

What if my construction project takes longer than expected?

It is crucial to talk to your contractor and discuss the home-building timeline and any factors that could potentially delay the job. Delays can result in changes to your loan’s interest rates, which may lead to higher payments. They can also cause disbursement delays for construction-only loans. If your project takes longer than anticipated, work with your contractor to resolve any bottlenecks, and keep in touch with your lender to inform them of the situation. Maintaining clear and consistent communication can help prevent major issues with the loan.

John Otero

John Otero

John Otero is an industry practitioner with more than 15 years of experience in the insurance industry. He has held various senior management roles both in the insurance companies and insurance brokers during this span of time. He began his insurance career in 2004 as an office assistant at an agency in her hometown of Duluth, MN. He got licensed as a producer while working at that agency and progressed to serve as an office manager. Working in the agency is how he fell in love with the industry. He saw firsthand the good that insurance consumers experienced by having the proper protection. John has diverse experience in corporate & consumer insurance services, across a range of vocations. His specialties include Major Corporate risk management and insurance programs, and Financial Lines He has been instrumental in making his firm as one of the leading organizations in the country in generating sustainable rapid growth of the company while maintaining service excellence to clients.

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