How to Get a Construction Loan With 20 Percent Down
A construction loan can finance the building of a new home. Typically, you need to make a down payment of at least 20 percent on a construction loan, although some lenders offer higher loan-to-value loans. To get a construction loan, you must prove to a lender that you can afford the debt and that you have realistic plans in place to build the home. Generally, lenders do not finance owner-built homes, so you must provide the lenders with construction plans that are drawn up by an established construction firm.
Other People Are Reading
Instructions
-
-
1
Find a suitable site to build your home and agree to a purchase price for a plot of land. Meet with several builders and obtain quotes for building a house on the site. Choose the builder that provides you with a plan that best suits your needs and quotes an affordable price.
-
2
Contact several lenders in your area to find out each lender's program for construction loans. Arrange to meet with two or three lenders that offer construction loans on which you can make a down payment of 20 percent or less. Provide the lenders with your land-purchase agreement and the building plans and quotes from your builder.
-
-
3
Give each lender your permission to check your credit score so that the lenders can quote you an interest rate based on your actual financial situation a hypothetical rate. Ask each lender to provide you with a full good-faith estimate, or GFE. Review the GFEs to determine the best loan option in terms of overall cost.
-
4
Provide to the lender that offered the best terms your most recent pay slips, two years of W-2 forms, 60 days of bank statements and your last 2 years of tax returns. At the loan closing, you must write a check to cover your 20 percent down payment toward the land purchase and the building of the home. The lender releases funds to the builder, as needed, after the closing.
-
1
Tips & Warnings
During the house construction process, you usually make interest-only payments -- which proves helpful if you are also paying rent to live somewhere else during construction. You begin making principal and interest payments once your builder provides the lender with a certificate of completion. In many instances, you can pay a small conversion fee at this point to convert your loan to a conventional 15- or 30-year fixed rate mortgage. Doing so enables you to move from a variable-rate loan to a low, fixed-rate loan.
The 20-percent down payment on a construction loan goes towards the cost of building your home but does not cover closing costs. In addition to the down payment, you have to pay property tax, insurance and the lender's processing fees. You must have sufficient cash reserves to cover these costs; depending on the size of the home and the loan term, closing costs could add thousands of dollars to your upfront costs.
