Scoring the Best Loans for New Home Construction

by on May 11, 2012Tim Houghten

It’s an incredible time to get a sweet deal on a brand new house, but are there any good loans for new home construction left, and where will you find the best options?

Types of Loans for New Home Construction

financing new construction homesBuilding a dream home on a dream lot overlooking the ocean or with a spectacular mountain view may be everyone’s fantasy, but you had better check out your financing options before you break out the shovel.

You need to know where to score the best terms, how much you can expect to borrow, and the requirements for different types of new construction home loans, or you could be left with a very expensive hole in the ground and not much else.

Construction-Perm Loans

Designing and building a custom home from the ground up can be an exciting prospect, but finding construction loans for this type of project is far from easy today. Construction loans have always been one of the riskiest types of lending for banks, and the bust of the early 2000s saw lenders stuck with an incredible number of these loans, while construction loan programs evaporated.

Tip: With construction REOs making up the largest percentage of foreclosure properties on many banks’ books, you may find amazing bargains on homes which were started and never finished.

Still, if you really have your heart set on bringing your custom dream-home to life to your exact specifications, expect to put down more money and jump through a few extra hoops. These loans normally provide funds for acquiring your lot, building and then roll into a permanent loan once it is completed.

New Construction Loans

Many borrowers will find it extremely difficult to obtain construction-perm home loans today. However, this doesn’t mean you can’t find great new construction home loans all over the U.S. for financing brand new condos or homes in developments with custom finishes.

Also known as “end loans,” this puts the financial responsibility of the construction on the builder, allows you to select from a variety of pre-designed models, and select certain upgrades or personalized finishes based on your own tastes. This gives you that new home smell and prestige while making getting a loan a lot easier.

You sign the contract, let the builder go to work, and once the C.O. (Certificate of Occupancy) is delivered, you take out an end loan. Fortunately, these are much easier to qualify for and borrowers can actually use almost any type of conventional loan for this purpose.

Lot Loans

For those who simply don’t want to conform and must build their own unique living arrangements but just can’t afford it today, perhaps simply taking advantage of today’s low interest rates and land prices by buying a premium lot or acreage to build on later is the best way to go. Ask about better terms on shorter loans if you plan to build within the next few years.

Is 100% Financing Possible for New Construction Homes?

For those who only need an end loan, there are still numerous choices for finding financing. While conventional loans may be tough to qualify for today, there are a number of attractive options available to first-time homebuyers and move-up buyers alike.

Low or No Down Payment Loans for New Home Construction:

Beware the In-House Lender!

Buyers spending their weekends browsing new communities and condo projects will often find they are offered financing by an in-house loan officer. Tread carefully here.

You may be offered certain “incentives” to utilize these on-site or recommended loan options for new home construction deals. However, this doesn’t always mean they are anywhere near the best deal. They may pressure and try to scare you into using them as they may be illegally gaining kickbacks from these loan officers, but know that they cannot require you to use their preferred lender. You should always shop around and make sure that you are getting the best deal on rates, fees and terms for your personal situation.

4 More New Construction Loan Issues to Watch For

1.  Purchasing the model or buying in later project phases can result in overpriced homes that won’t appraise.

2.  Builders are incredibly unforgiving if you run past your closing date and will try to keep your deposits. Apply for a loan as early as possible.

3.  Some lenders and programs may have restrictions on the communities for which they will make loans.

4.  Interest rates could change dramatically before your home is completed. Ask about extended locks and “float-downs” as rates drop.

{ 31 comments… read them below or add one }

Gwendolyn Morris October 22, 2014 at 11:01 am

I have two acres of land in Middlesex county, va. I was working to obtain a construction-perm loan with BB&T. They denied my loan due to High income to ratio.
This was because of my 2012 & 2013 taxes which itemized deductions brought the end income result down below poverty level. They did not take in consideration of my 2014 income of 35,000, my ss# benefit of 1071.00 monthly, my pension of $218.00 monthly. What can I do to set this right?. I am currently paying of all bills but two credit cards. I no longer have a mortgage, no car payments. I am waiting to do 2014 taxes where there will little to none itemized deductions. Please help!!!!

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Sherry October 19, 2014 at 5:40 pm

I have some property in the Colorado mountains in Carbondale and need to get a loan to start building and I need a builder. Can anyone give me any information.

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Marcus Hode September 14, 2014 at 4:45 am

I live in michigan an is looking to move by January want to get house built my credit is not that good highest score 602. Can u direct me on how to go by getting started on this process?

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Silvia August 18, 2014 at 3:40 pm

Hi,
We currently own a home and is having a hard time selling it. We are planning on building a new home and renting out our current home. How long do we have to rent our current home out before we can use it as an income property to get a construction loan?

Thank you!

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Leslie June 17, 2014 at 10:47 pm

I’m a lil scared, however God has brought me this far!
I’m 40yrs old have a six yr old son and a low credit score.
I want to build on two acres deeded to me as my forever home.
My score is from having no credit history and medical bills and small student loan.
Id like $200,000. loan for a 2000sq.ft. home build energy efficient way.
I have life time disability income and steady child support.
Do I have a chance? My middle score is 545.

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Karen August 9, 2014 at 12:27 pm

Leslie,
If your 2 acres is outside of city limits then a USDA Rural Development loan would be great for you for several reasons. First, they base your house payment depending on your income. I’ve been a builder for many years and have dealt
with them. I had one customer that had payments under $500. a month for
a $135,000. home. There is no down payment and your score of 545 should be sufficient. What they do require is that you are current on every single bill for the past 12 months. Also, you might want to consider a 1600 square foot home. With just you and your son right now that’s plenty of room and there are some great floor plans out there. You can always add on later if you need to. Good
Luck!

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Elizabeth Matthews May 6, 2014 at 12:44 pm

Hi, we are building a house in Jamestown, Colorado. We own it outright, with no loans, or liens from our subcontractors. The house and land as is is currently valued by the Boulder County Assessor’s Office at $315,000. We are within spitting distance of our Certificate of Occupancy. We need to borrow $75,000 to get there, hopefully a construction loan that will convert into a permanent loan. Ww have been the GCs on the build and have a lovely almost complete house. Where can we go to get a construction loan late in the build process, and do you know of any lender who is willing to go the extra mile for folks in Jamestown, which was hit so badly int he September floods? We are not such a bad risk as most of the build is done, and we are not in the flood plain!

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KC February 24, 2014 at 10:43 pm

Good Evening. My fiancee and I would like to build on our land that is paid for. We are seeking 100% financing (if available). We are currently working with a General Contractor and getting estimates. Please help.

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Sanshi February 18, 2014 at 9:38 am

We live in Upstate NY and are looking forward to build a house on a 7+ acre lot in a beautiful rural area. Lot is fully paid for and We have floor plans ready to go.
We are working with a builder who can start the building as soon as get the loan. We currently live in a house that we refinanced in 201: and have very little equity. We are working full time with annual salary of 100K.
Is there any bank/private lander who can give construction to perm loan for building? Our credit score is over 715.
We would rent our current house once we move out to new house.

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James November 13, 2013 at 4:36 pm

I enjoyed your article especially the tip on REO’s without occupancy permits. Do you have any currently available?

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Eric Rodriguez October 16, 2013 at 9:28 am

I live in Brownsville, Texas. I have been trying to find the answer to this question for over a year and no one in my community or online has been able to give me a clear cut answer. My wife and I currently own a home that we owe about $33K on. We have excellent fico scores of 780 each and have very little debt. We would like to build our own dream home as we have family that own: electrical, plumbing, Air Conditioning and house designing firm companies. We don’t want to pay a contractor $30-$45k just to subcontract companies that we already have family that own them. We have a lot (half acre lot) in a very nice neighborhood that we’d like to build but how do we go about getting a loan to purchase the lot and to build the home ourselves? People locally tell me I can’t do it because the bank will never lend me the money to build on my own. Some people say I have to get a contractor’s license and have about 500K in my bank checking account? Can someone tell me PLEASE if I can do this or if I MUST GO THROUGH a contractor to build our dream home in Brownsville, Texas (Cameron County). Thank you.

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jeff October 24, 2013 at 8:20 am

try talking to Washington Federal.

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Cyndi Person August 8, 2013 at 8:36 am

My husband and I have land that is paid for.(a little over two acres). Land value in that area is $25,000.00 a acre. We currently live in a ranch style brick home that has two years owed on it. ($20,000.00). We have our house plans already and it has been priced by two builders in our area. We would sell the home we are in and use the equity as down pmt on new build home. We got a price of $254,000.00 from one builder and $248,000.00 from another builder. Our income would support that price. Our credit is always paid on time and in good standing, with my credit score being higher than my husbands because co-signed for our younger son to go to college and he had to get private school loans and could not qualify for federal because of his fathers income. My younger son did pay on his school loans after college but then lost his job and did not find one for awhile. His school loan defaulted without our knowledge and we did not find out until we started looking for a construction to perm. loan and was told by the bank we were going to use that it defaulted. Now my son has a good job with the state as a corrections officer and we tracked down the loan and he has set it up on bank draft to be paid mthly. The people that have his loan now said that if he is paying and the money is there when they draft and it has been that we could get a letter to that fact. Here is what i would like to know? For people like us who has kept their credit in good standing, has lived in their current home for over 30 yrs, has been married for over 30 yrs, has been at their job for over 15 yrs, and only has that one thing showing on their report and only co-signer, is there anyone out there who would do a construction to perm. loan? Please email me at the above address. I KNOW SOMEWHERE OUT THERE, THERE HAS GOT TO BE SOMEONE THAT CAN HELP! Just for reference: We live in North Carolina.

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Colin October 7, 2013 at 7:48 am

hey cindy, im building an online community to help owner builders get started on the right foot with the construction loan process. i want to ask you some questions. can you send me a good number via email? thanks.

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Craig November 13, 2013 at 1:54 pm

Colin
please contact me regarding your construction loan process.
Thanks
Craig

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Melissa January 14, 2014 at 7:47 pm

Did you has this online community been started? How do I join in?-Melissa

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CLara March 11, 2014 at 10:12 am

I might like to join as well. I have fairly good credit, I earn 104k a yr and about 41k for a lot. I need a lean to build a home for me and my disabled son. I was told I could build what I want for about 120k but I think 150k might be more realistic.

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Diane July 28, 2014 at 10:39 am

Any information you can send my way?

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carre July 29, 2013 at 9:59 am

looking for a VA construction loan asap. anyone out there that lends this type of loan??? it has been very hard to find a bank that will do this VA construction loan but I am told by the US government they exists. any info would be great.

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Andrea April 22, 2014 at 1:32 pm

Carre, Have you found someone that will do the VA Construction Loan??? We have found an unfinished house that we would like to take over and finish but every lead has been exhausted! Everyone has told us that the home has to be “move in ready”. PLEASE let me know either way! Thanks!

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Colette Merchant April 30, 2013 at 12:52 pm

My husband and I started building our dream home 7 years ago, my husband and his father were business partners. The business he is part owners of is in my husbands parents family trust. Well 6 years ago my husbands dad died of cancer and at this point all business power went to my husbands mom, who is in bad health, elderly and not a good business woman. As a result our half built dream home came to a screeching halt. My husbands mother literally told him”it can sit there and rot until I die for all I care”! Even the land the house was being built on was in my husbands parents family trust. So my grandmother decided to get a reverse mortgage and gave us enough money to at least get the house stuccoed, drywalled, textured, and the doors on where we could lock it up. We also got the land it sits on out of husbands families trust and put into our name thank goodness. This was 3 years ago, we are paying taxes,insurance and monthly payments back to my grandmother for her loan to us. We recently payed another $2400 to the building department to extend the permit and have to get something inspected every 6 mos or we will have to pay the entire permit all over again in the neighborhood of $6000.00.. The inspector told my husband in 6 months we need to get our final.. Final meaning it has to pass inspection to live in fully working kitchen, flooring, bathrooms done, ext..My husband is owner builder. The house is amazing, on a half irrigated acre in AZ 15 min from Sedona AZ.. We are so close but need about $50k to finish it. We can not sell it as is, and can not live in it as is.. We have been living in a double-wide trailer that we own for they last 18 years. This is our first home in 21 years of marriage and has been a complete nightmare! Is there anything any way we could get a $50k loan to finish you can think of? What would you suggest at this point. The house completed will be worth close to $ 950.K that is what the insurance agent who looked at it said, we have about $200.k into it paid free and clear, except what we owe my grandma (and that is not much). We need help and don’t know what to do..

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Josh Stoner July 22, 2013 at 8:32 pm

We might be able to help you, have you found financing to complete this project?

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Kelly August 4, 2013 at 8:51 am

The moral of your story is don’t ever mix up family and business? I have seen these things go wrong many times before I hate to even loan money to family unless I assume ill never get it back.

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maryhelen Gonzalez April 29, 2013 at 5:59 pm

My husband and I have been running into one challenge after another as we are trying to qualify for a loan to purchase another home. We currently own a home and have started renting it out 2 months ago and are looking to upgrade. We have been told in order to qualify right now we would need to sell our home as it is going as debt against us. Any advice?

Thank you!

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Josh Stoner July 22, 2013 at 8:30 pm

What state are you in? How much is owed and what is the value on the home you are renting?

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teng April 24, 2013 at 2:14 pm

Hi,
I have a land paid for and a home plan ready for a modular home building in a rural zone.
Who should I approach for construction and end loan ?

TT

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Raymond April 10, 2013 at 1:54 pm

I started a major remoleding project on my existing home. I added a 20 x 40 garage with a livingroom above it. I also added two additional bedrooms and a full bath on a new second level. The first floor is almost completed. The second floor is still only framed and shelled. The electric and plumbing are already in place. I have used up all my saved finances ($100,000) for this project. I am living in the house because two existing bedrooms and kitchen were not effected by this new work. My question is would I qualify for a construction loan at this point? I have equity in the house because I had no previous mortgage before I started. Am I less of a risk because I am so close to completion? The house is in New Hampshire.

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Casey March 12, 2013 at 10:30 am

Good info! Thanks!

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jerricho eversole March 8, 2013 at 4:53 pm

i am looking for a fixed rate for a new construction loan in the amount of 150k

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Josh February 21, 2013 at 11:21 pm

I am a first time home buyer and want to build a new home in a rural area. I am preaproved through a mortgage companity and they won’t do new home construction loans. My question is their any lenders that will give you a loan with zero down for the money browed. If not, then what do most banks want you to but down?

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Shannon O'Brien March 9, 2013 at 12:20 pm

Hi Josh,

I’m have no idea what you’re income is, but the USDA has loans for new home construction in rural areas. It’s for moderate to low income folks. See if you qualify at this site: rurdev.usda.gov/HSF-About_Guaranteed_Loans.html.

Otherwise, try local credit unions and local banks. If they can’t help you, ask for a referral to a lender who can.

If you don’t have your heart set on new construction, you could consider an existing home, a fixer, and use the FHA’s 203k rehab program to bring it up to what you want. Find out more about that here: portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou.

Hope you find what you need.

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