A construction loan for building a residential property is a lot harder to qualify for than a traditional home loan. You have to commit to a higher interest rate and shorter repayment window, but the biggest challenge is meeting the hefty down payment requirement.
First-time homebuyers can qualify for financing deals for as little as 5% money down, but if you’re looking for construction loan programs, most lenders ask for at least 20% as a down payment. So, how to get a construction loan with no money down—is it even an option, or would it send you on a wild goose chase?
Getting a construction loan without laying out a down payment is attainable, but only under certain circumstances and with a well-thought-out strategy. Our guide will help you plan—we’ll look at the options available while expanding our focus on alternative solutions for timely construction financing.
Construction Loan—Credit Score, Down Payment, and Other Requirements
Getting a real estate loan for a readymade home is easy because the debt is protected by the collateral—which is the underlying home. When you’re building a home from the ground up, the primary collateral is missing. Naturally, construction lenders are dealing with heavy risk exposure until the house is actually built, and this makes these loans difficult to acquire.
It’s common for seasoned property developers to go for commercial construction loans designed for profit-making activities, but these products don’t work for homeowners. If you’re building a residential property for yourself, you have to prove to the lender that you’re affluent enough to do so.
Source: Ron Lach
Traditional lenders (national and regional banks, credit unions, and specified financial institutions) usually have the following requirements for considering construction loans:
|680 or higher
|Debt-to-income (DTI) ratio
|45% or lower
|Enough to cover:
• Down payment
• Interest payments for a minimum of six months
• Contingency expenses (should be 3%–5% of the total cost of the project)
Besides your financial health, lenders also review your tax returns, insurance payments, and bank statements to ensure everything is up to date.
Construction Loan With No or Low Down Payment—Options
People typically don’t go for home construction until they have some savings to commence the project. That being said, there are several situations where putting in a down payment may be burdensome. For example, if you’re going to finance a new construction by selling your current home, it may take a while to find a suitable buyer. Despite the viability of the deal, banks won’t authorize any construction loan beyond the inflexible qualification guidelines rolled out by federal and state authorities.
If, for any reason, you cannot afford the down payment on a construction loan, you can consider the following options:
- Negotiate with a regional bank for a land-backed loan
- Explore construction loans insured by these government agencies:
- Get a hard money loan
We have presented all options in detail below so you can decide for yourself.
Can Land Work as Down Payment for Conventional Construction Loans?
If you already own the land or have a rundown property that requires reconstruction, its current market value could qualify as a down payment.
Say you need $180,000 for construction, and you’re going to use the lot you received from your parents as an inheritance. The lot is worth $45,000 in the market, which comes to 25% of the cost of construction. You can offer your land equity as 20% down, and the remaining 5% can act as your contingency reserve—it’s a neatly wrapped construction loan package.
Source: Amy Hirschi
We’ve observed that banks, credit unions, and private mortgage companies operating regionally are more open to land-backed construction loans than national banks. Local lenders have fewer clients and are motivated to increase their customer base, so they strive to accommodate every buyer’s needs. Depending on your situation, you can apply for a:
- Construction-only loan—The lender finances the start-to-finish building cost. You only pay the interest during the term and repay the loan amount on maturity by getting a new long-term mortgage on the finished property. Since there are two loans involved, you pay closing costs and processing fees twice
- Construction-to-permanent loan—A construction-to-permanent or one-time-close loan turns into a permanent mortgage product at the end of the construction phase. You have to manage a larger down payment for this option
Keep in mind that beyond the down payment consideration, conventional lenders won’t water down their screening procedure. You still need to meet the minimum credit score and cash reserve requirements.
What Are the Down Payment Requirements for Government-Backed Construction Loans?
Government-backed construction loans have minimal down payment requirements, but qualifying for them involves extensive paperwork and screening. Refer to the following table to evaluate your options:
|Minimum Down Payment
|FHA construction-to-permanent loan
|FHA construction loans are suitable for self-occupied properties. An FHA-approved lender asks for 3.5% down if you have a minimum credit score of 580. If your FICO score is between 500–579, you must arrange a 10% down.
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
|VA loans are a sensible option for eligible veterans or service members. Qualifying terms include:
• Credit score of 620+
• DTI ratio of 45%–50%
You also need to submit income proof and work with VA-registered builders to get the loan. The amount of down payment you offer impacts the funding fees, though. Here are the fee requirements for various down payment ranges:
• Below 5%—2.3%
• 5% to 10%—1.65%
• 10% or more—1.4%
|USDA combination construction-to-permanent loan
|USDA loans can be used to build fully-financed, primary-residence homes in specified rural areas. To qualify, you must have:
• Credit score of 640+
• DTI ratio of 41% or lower
• Income within USDA limits
While you don’t have to pay mortgage insurance, you must work with a USDA-approved contractor and get a new construction warranty from them
Government-insured loans have low interest rates, but due to the high volume of applicants, the rejection rate can be high.
Source: Tetiana SHYSHKINA
If you need more information on specific lenders, check out our reviews of:
How To Benefit From Hard Money Construction Loans
Hard money loans are short-term, no-nonsense asset-based loans—a borrower uses tangible assets like land, house, jewels, vehicles, and inventory to secure financing. The maximum loan you can acquire is calculated as a percentage of the asset value, also called the loan-to-value (LTV), which is usually between 40% and 70%.
Hard money loans are a popular choice for construction because they are a breeze to qualify for and have little to no requirements in terms of:
- Credit score
- DTI ratio
- Down payment
- Cash reserves
- Contractor choice
- Mortgage insurance
Here’s a sample scenario of how a hard money construction loan works. Say your construction budget is about $200,000, but you cannot afford the 20% down payment ($40,000) charged by the bank. The current home you’re living in is worth $300,000, free and clear from debt. If you approach a hard money lender, they would leverage the equity in your current home to offer you roughly 70% LTV, which is $210,000 ($300,000*70%)—and like that, your construction work is financed without you having to spend a dime.
Since hard money loans are completely asset-backed, the amount you can request is relative. The eligibility screening is simple and without aggressive documentation, though. These loans are a good option for emergency financing as they are processed faster when compared to conventional construction loans. You can also use hard money loans for:
Get No-Money-Down Construction Loans at Hard Money Loan Solutions
Florida-based Hard Money Loan Solutions (HMLS) is your one-stop fix for acquiring various asset-backed loans. The lending group has a 5-star rating on Google and is one of the most reliable and reputable lenders in the state’s real estate scene.
Source: Google Reviews
HMLS services construction loans with bad credit and no down payment requirements, provided you have collateral of sufficient value. The group comprises eclectic investors who have been financing projects for years. They offer practical advice for all types of hard money loans—apply for a free consultation today!
When it comes to residential or commercial construction loans, HMLS lenders do not shy away from challenging funding scenarios. If required, they can also collateralize multiple properties to fund your project. You’re only asked for interest payments during the tenure, so your financial burden is minimal. You can use the loan as a bridge solution or repay when you secure permanent mortgage financing—it’s smooth sailing throughout!
Check out the four main features of HMLS lending services:
- High flexibility—Every client gets access to personalized services. The loan product is designed keeping their needs and repayment capacity in mind
- Transparent discussions—HMLS prioritizes lending transparency and ethical communications. The group welcomes and clarifies all doubts a borrower may have
- Low paperwork—In most cases, HMLS only asks for your property- and construction-related documents
- Speedy delivery—Qualified applicants can have the funds in their account within 3–14 days
HMLS Construction Loans—Structure and Costs
If we’re talking structure, HMLS constructions are much like conventional construction loans, but with the following differences:
- Bulk funding—Banks offer construction loan funding in phases (released to the contractor) and may even suspend your loan if they find the progress unsatisfactory. HMLS provides the entire loan amount directly to the client and never backs out from the commitment once the approval is done
- No on-site inspections—Since the funds are released right away, HMLS lenders have no need to conduct on-site inspections. Overall, you enjoy more independence
Hard money loans are marginally costlier than bank loans because of the higher lending risk. At HMLS, the interest rates are always fair. The table below outlines a base HMLS package (the final package is eventually customized to suit the borrower:
|9.99%–12% (lower LTVs get lower rates)
|Up to 70% of the current purchase price or appraised asset value, whichever is lower
|• Residential (single- or multi-unit)
(Non-real estate collateral also works)
|Interest rate type
|2 points or 2%
|3 days to 2 weeks
|No penalty if repaid after 6 months
Source: Andrea Piacquadio
How Loans Get Serviced at HMLS
Here are the three stages that a typical lending cycle at HMLS entails:
- Pre-approval—This stage involves verbal, to-the-point discussions over the phone. The lender reaches out to you after going over your application and asks you about your construction project, collateral, and repayment strategy
- Appraisal—The HMLS analytical team assesses the lending risk by appraising the collateral value. They will tailor a loan plan if they agree to finance
- Legal work and funding—If you accept the plan, the group’s legal partners set up the loan deed, and the lenders prepare to disburse the funds
HMLS lenders encourage no-money-down borrowers to shop around for various products before deciding what serves them the best. If you’re struggling to make a choice, drop an online loan application at HMLS and have a lender call you. The lending team honors the integrity of trust-based client relationships—discuss your funding issue to get honest suggestions.
Featured image source: Andrea Piacquadio