If you’re looking to build or remodel your dream home from the ground up, home construction loans could pave the way.
Also known as a self-build loan, a home construction loan allows aspiring homeowners to borrow for the costs of their building or renovation project. The loan could cover everything from the land where your home is being built to the construction company’s fees to the cost of materials and other needs.
If this sounds like a financing option for you, check out our beginner’s guide to construction loans below, plus where you can find them.
How home construction loans work
Lenders view building-from-scratch projects as risky propositions. That’s because the nonexistent home can’t be used as collateral like in a traditional home mortgage. As a result, the price tag for a construction loan can be high.
For example, the rates on this type of loan are higher than on a traditional mortgage. You’ll also have a variable rate and a short repayment term.
Lenders also ask borrowers for an initial down payment on the loan. In fact, they might insist on 20% to 25% of the project cost, although some lenders allow a smaller down payment in the 10% range.
What’s more, the lender disburses the loan amount to the homebuilder, not the homeowner — and not all at once. The lender makes installment payments at each stage of construction. An inspector typically hired by the lender will also visit the building site to track progress on construction.
During the construction phase, you’ll make interest-only payments on your home construction loan. Since it’s a variable-rate loan, those interest-only payment amounts can increase or decrease during construction.
When construction has finished, the lender will likely give you the option to pay off the loan or convert your unpaid loan amount into a traditional home mortgage.
Different types of home construction loans
There are four variations of home construction loans for aspiring homeowners.
- Construction-to-permanent: When construction is complete, your loan will be converted into a traditional mortgage. With a construction-to-permanent loan, you’ll pay closing costs once and get to lock in your mortgage interest rate.
- Construction only: You could opt to take out two loans: one for constructions costs and another for your mortgage. You’ll get to shop for a mortgage lender while construction is being completed. With this two-time-close loan, you’ll pay closing costs a second time when you take out a mortgage.
- Renovation: If you’re working with a fixer-upper, you could borrow against the expected value of your renovated home. Keep in mind that there are plenty of alternative ways to pay for home renovations, including a home equity line of credit or a personal loan for minor repairs.
- Owner-builder construction: If you’re the builder of your own house and have the certification to prove it, you could take out this type of loan.
- End loan: With this type of loan, the builder takes on the costs of constructing your new home. When it’s complete, you buy the finished home from the builder with a mortgage.
No matter the loan type that makes the most sense for your situation, you’ll want to ensure you’re financially able to move forward. Do you have enough income, for example, to cover living costs while the home is being built?
Building a new house, or fixing up an old one, can get expensive fast. Proceed with caution. You don’t want to pay more for your future home than it’ll be worth when it’s done.
How to find home construction loans
You’re most likely to find a home construction loan with a regional bank or credit union in your community since many big banks don’t offer them. You can find a local loan officer or mortgage advisor by searching national banks’ directories online.
If you’re considering online lenders such as Waterstone Mortgage Corporation, make sure you compare multiple offers before settling on one.
Similar to buying a house, it’s wise to get pre-qualified for a home construction before you start picking out furniture. But qualifying for a home construction loan with one of these types of lenders is no walk in the park.
You’ll be judged primarily on your credit history and debt-to-income ratio. But there are a host of other factors that might be considered. At TD Bank, for example, you’ll need to supply a signed contract with your builder that details the budget and timeline of your project.
Partnering with a certified builder or developer is the first step for most aspiring homeowners. Choosing the right builder is crucial because it could mean fewer expensive delays in construction. Short of referrals, you might start your search for one via the National Association of Home Builders’ online directory.
Before you get that far, however, it’s wise to take one more look at your finances. Begin by asking yourself how much house you can afford. Then you’ll want to tack on the extra costs of borrowing to build it.
Get multiple mortgage offers at once
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|5.99% – 24.99%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|