Getting a Construction Loan to Build or Renovate Your Home

What kind of projects are best suited for a construction loan?

Whether you're a first-time homebuyer or an experienced homeowner, a construction loan can be as unique as the project you're financing. Some projects that are good candidates for a construction loan include:

New home construction:

  • A new home purchase where the builder requires payment in installments as the home is being completed
  • Building a home on a lot you already own

Home renovations:

  • A purchase of an existing home that requires renovation
  • Renovations to your current home as part of a mortgage refinance that includes your existing mortgage and construction costs

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Ready to get started?

Find a local Mortgage Loan Officer and start your mortgage journey today.

How do I know how much to borrow?

To help you figure out how much to borrow, you'll first want to talk with your builder to decide how much your new home construction will cost.

Like any mortgage, you want to ensure your monthly payments fit within your budget, and during construction, you may have added costs. Construction loans only cover the cost of land and construction, not living expenses while your house is being built.

Many people, for example, plan to use the proceeds from the sale of their current home to help finance the construction of their new home. This allows them to make a larger down payment and reduce the size of their loan.

But, keep in mind, if you've sold your home, you may need to factor in the cost of rent while your new home is being built. Renting during home construction will add to your living expenses, so budget accordingly to afford rent, construction costs and other living expenses.

What documents do I need to apply?

Apart from a few specific documents, the overall process for applying and securing a construction loan does not vary from state to state. To get qualified and apply you will need:
  • Your basic debt, income and asset information
  • A signed construction or purchase contract with your builder or developer. The contract will detail certain aspects that will impact your loan, such as: contract amount (including construction and cost of land), and the construction start and completion dates
  • The builder will need to provide financial statements as well as current license and insurance documentation
  • Borrowers in search of a builder's mortgage, meaning those who plan to self-build and/or act as their own general contractor, will need to demonstrate that they are an experienced, licensed, and insured builder

How much down payment do I need?

A construction to permanent mortgage requires 20% of the sales price as down payment or 20% equity in the transaction. Keep in mind:
  • Sales price is calculated based on the cost of the land/lot plus the cost of construction
  • If the property has been owned for more than 12 months, the fair market value may be used to calculate total purchase price
  • The end or "as constructed value" of the home may be greater than the sales price calculated for down payment
  • Any funds used towards construction such as architectural plans, building permits, cash used to purchase the lot, etc. may be included as part of the down payment – talk with a Mortgage Loan Officer for more details.

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