Construction Loan
Finance the building of a new home, often converting to a permanent mortgage upon completion.
Overview
A construction loan provides funding to build a new home from the ground up. These short-term loans disburse funds in stages as construction progresses, and the borrower typically pays interest only during the building phase. Most construction loans convert to a permanent mortgage (construction-to-permanent) upon completion, though some require separate permanent financing. Higher rates, larger down payments, and more documentation are standard due to the increased risk.
Min. Down
20-25%
Min. Credit
680
Term
12-18 months (construction) + 30 year permanent yr
PMI
No
Best For
- Custom home builders
- Buyers who want a new construction home
- Land owners ready to build
- Those who cannot find existing homes in their market
Pros
- Finance a custom-built home
- Only pay interest during construction
- Construction-to-permanent saves on closing costs
- Can lock in permanent rate upfront
- Build exactly what you want
Cons
- Higher interest rates than traditional mortgages
- Larger down payment required (20-25%)
- Complex process with multiple inspections
- Risk of cost overruns
- Limited lender availability
- Construction delays impact costs
Requirements
- Minimum 680 credit score
- 20-25% down payment
- Detailed construction plans and budget
- Licensed contractor required
- Land ownership or purchase plan
- Construction timeline
- Multiple appraisals and inspections