Understanding and planning for upfront loan costs are one of the best things you can do to prepare yourself when buying a home—financially and emotionally.
If you’re planning to build a new home from the ground up or renovate your current home, fear not. You have a variety of loan products to choose from!
We’re going to review the different types of construction loans, down payment requirements, how to calculate them, and how to apply.
We’ll also share how you can receive a home loan quote from a nationwide mortgage lender qualified to provide a wide range of construction loans.
Types of construction loans
Construction loans were created to make building your dream home or remodeling easier.
You can narrow down the list of loan products by starting with your homeownership goals and mortgage qualifications.
Construction-only loans
Construction-only loans are used only to cover construction costs. These loans differ from a mortgage as they have much shorter loan terms.
While the terms are shorter, the interest rates are typically higher than most, as these loans are deemed riskier for both the lender and the buyer.
Renovation loan
Renovation loans are for buyers looking to purchase and renovate a new home or for homeowners looking to renovate their current home. You see these loans mainly in the form of a 203(K) loan.
These loans can bundle the costs of repairing or remodeling and the home loan into one loan.
Conventional conforming and super-conforming construction loans
Conventional conforming and conventional super-conforming construction loans are home mortgages backed by the federal government, like the FHA and the VA, and provided through private lenders.
Because of this, they usually have flexible requirements, like better interest rates and little to no down payment. The only difference between conventional and super conforming construction loans are the loan limits.
Conventional conforming loan limits for low-cost areas are up to $726,200 and are $1,089,300 for higher-cost regions.
Jumbo construction loans
Jumbo construction loans are home loans that exceed the conforming loan limitations, so they can be used to purchase a home at a hefty price.
Rather than the government, a private lender provides these loans, so you’ll have to follow the lender’s requirements.
Regardless of which type of construction loan you decide on, it’s beneficial to understand all of the possible requirements you’ll come across with a construction loan.
One of the more essential requirements we need to discuss is the down payment.
When is a down payment due?
A down payment for a construction loan is always due when you close on your loan.
Because it’s due at the time of closing, the type of construction loan you choose will determine your timeline.
If you decide to bundle the purchase of the land, cost to build, and home mortgage into one construction loan, then you can expect the following timeline:
- Preapproval
- Find a builder and gather all building costs and plans
- Applying for a construction loan
- Approval
- Close on the construction loan
- Construction begins
- Builder is paid periodically throughout the project
- Construction completes
- Monthly mortgage payments begin
For this type of home mortgage, you’ll have to close on the loan and make your down payment before the construction can begin.
Timelines for each type of loan
Closing on the construction loan may not happen immediately as it takes time to find a builder, create construction plans and sign contracts. This must be done before you close and pay the down payment for a construction loan.
Some construction loans, such as FHA and VA construction loans, will require you to work with an approved consultant to ensure your home or remodeling project is up-to-code.
For construction-only loans, your timeline will be more expedited, meaning you may have to make that down payment much sooner.
With renovation loans, the timeline will vary depending on whether you’re purchasing a new home or renovating your current home.
If you’re purchasing and renovating, you may have a lengthier timeline as you’re preparing to purchase a property while also following the requirements for construction.
When you renovate your current home, you’ll have to show your home is in good condition for renovations, along with your building plans, before you can close.
Either way, the down payment for a renovation construction loan will be due at the time of closing.
Calculating the down payment for a construction loan
Your down payment amount will also differ depending on your construction loan.
For example, FHA construction loans require a down payment as small as 3.5%, whereas conventional home mortgages can range up to 20% of the home loan.
VA loans and FHA loans require little to no down payment which is an extremely beneficial offering.
You can calculate your down payment for a construction loan by multiplying the total amount of your potential loan by the expected percentage.
If you’re considering applying for a $400,000 home and will need to make a minimum down payment of 20%, the minimum down payment of $80,000 (400,000 X .20 = 80,000).
For example, if you’re considering applying for a $400,000 home with a 3.5% down payment, you’ll pay around $14,000 (400,000 X .035 = 14,000).
One of the ways you can see how much home you can afford is by using a mortgage calculator. These tools estimate how much you may pay for a down payment and for a monthly mortgage payment.
Applying for a construction loan with The Federal Savings Bank
Applying for a construction loan may seem daunting, but with the right lending team by your side, the process can be seamless and pain-free.
At the Federal Savings Bank, we’re committed to serving our communities and our veterans, which is why we offer a variety of construction loans to fit various home-buying and building goals.
We’re happy to discuss how much you may have to pay for a down payment for a construction loan and how to get started.
Connect with us for a free construction loan quote.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to you individual situation.
