CONSTRUCTION LOANS: EVERYTHING YOU NEED TO KNOW - photo graphics pointing pen signing contract


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Applying for a construction loan can take months of preparation.
To make sure that you get the lowest rates, start compiling your documents in advance.


construction loan can be used for a number of purposes - photo graphics holding keychain at construction site

Construction can famously be a costly endeavor. Though there are ways to fund construction projects yourself, often, the best route for construction funding is through a construction loan.

A construction loan can be used for a number of purposes, including renovation, development and construction. But, most of the time a construction loan is used to finance the building of a residential home or real estate project from the ground up. Typically, it is a short-term loan that is issued in installments and is intended to be repaid within a period of 18 months or less.


Development and construction:

Most often, a construction loan is used to finance the cost of building a new home. Whether this entails an entire housing development project or just a single custom-build home, a construction loan can cover anything from drawing out building plans to permit costs to labor costs to building materials and everything in between. To pay for the land, you can inquire about residential land loans.

DEVELOPMENT AND CONSTRUCTION - photo graphics crane construction site
RENOVATION AND REPAIR - photo graphics blueprints key

Renovation and repair:

A construction loan can also be used for a renovation or restoration project, but it is not usually advised. For one, construction loans can be difficult to qualify for. Furthermore, they can be paperwork heavy and may require you to refinance your current mortgage to more undesirable rates. Because construction loan rates are typically quite high, you may not want to forgo your residential home loan rates for residential construction loan rates.


PROS & CONS OF A CONSTRUCTION LOAN - photo graphics handshake holding blueprint case


A residential construction loan can be the fastest way to pay your contractor to build your dream home. The amount of funds depends on the scope of the project and estimated value of the future home. A construction loan can pay for up to 90% of the total cost of the project. For example, if the appraised value of the future home is $500,000, you can get up to $400,000 in residential construction loan financing.

VARIABLE OR FIXED-RATE INTEREST - photo graphics typing on laptop

Variable or fixed-rate interest

Construction loans can be issued with variable interest rates that change over time or fixed interest rates. Though there can be advantages of variable interest rates, fixed-rates are sometimes preferable as they are consistent and easier to budget for. If you get a good rate, be sure to lock it in.

INTEREST-ONLY PAYMENTS - photo graphics building module contract pen

Interest-only payments

A benefit of a construction loan is that you do not make payments on the principal immediately. Instead, you only make interest payments while the project is being completed. And, you only pay interest on the money that you have been issued, as you receive installments.

UNSECURED LOAN - photo graphics phone calculator measuring tape writing on notepad

Unsecured loan

Unlike typical residential home loans or a residential hard money loan that uses the home as collateral for the mortgage, a construction loan is an unsecured loan. A construction loan is not issued based on the completed home as collateral. This means that you will be charged high interest rates and a large down payment. Construction loan rates are usually much higher than current residential mortgage rates.

NEED TO FIND A CONTRACTOR - photo graphics holding building module laptop hard hat

Need to find a contractor

Moreover, you cannot take out a construction loan to build the home yourself— you must find a contractor or builder. The lender will pay the contractor or builder directly in installment payments throughout the construction process. The money is not issued in a lump sum. Instead, as each draw period comes to a close, an inspector will come to survey the project and judge whether more money can be issued.

If you’d like to build the home yourself, seek out
An owner-builder construction loan.


CONSTRUCTION-TO-PERMANENT LOAN - photo graphics building module contract pen

Construction-to-permanent loan

It’s possible to convert the construction loan into a typical residential home mortgage after the project is completed. The mortgage is a standard 15-30 year loan. Once the home is move-in ready, you can begin with making your primary residential mortgage payments. This can be advantageous because it allows you to save money on fees and closing costs.

construction loan

If you want to do the construction yourself, you are going to need an owner-builder construction loan to finance the costs. This is because lenders have stringent rules about home construction and regulations like complying with local building codes. It is often only possible to get a construction loan if you are a licensed builder.

OWNER-BUILDER CONSTRUCTION LOAN - photo graphics stack of dollar bills building module signed contract handshake
RENOVATION LOAN - photo graphics comparing notes on ipad

Renovation loan

While a construction loan can be used for renovation, it is often recommended to apply for a home renovation loan instead. Depending on the scope of a renovation project, you don’t even need a renovation loan. Renovations under $25,000 can be financed with a credit card or a personal loan. Moreover, you can use equity in your home or even a line of credit for a more affordable loan.


The process of acquiring a construction loan is rather different from the typical home mortgage loan. When applying for a residential building loan, residential construction lenders will typically require the following:

CREDIT SCORE - photo graphics credit card icon in a green circle

Credit Score

Like any other traditional loan, construction lenders will require that you have a good credit score. Aim to get your credit score above 680+ to get the best rates.

LOW DEBT-TO-INCOME RATIO - photo graphics looping arrows in a green circle

Debt-To-Income Ratio

You will want to show that you are not drowning in debt. Try and pay off any outstanding debts to lower your DTI ratio.

PROOF OF INCOME - photo graphics contract icon in a green circle

Proof of Income

You’ll need to supply financial documents that show how much money you make so that lenders can verify that you are financially soluble and can pay back the loan.

DOWN PAYMENT - photo graphics dollar bill icon in a green circle

Down Payment

You’ll need to put 20-25% of the total loan in a down payment before you can get issued any part of the loan.

LICENSED BUILDER - photo graphics house icon in a green circle

Licensed Builder

For a construction loan to be issued, you will need to find a trustworthy construction partner. Be sure to research vetted and licensed contractors. The quality of the builder you hire is crucial as it will impact the speed at which the loan is distributed. It will also impact the total value of the building project — a low quality builder will construct a low quality home. Inexperienced builders may also end up making mistakes that will cost you more money in the long run.

CONSTRUCTION PLAN & DRAFT - photo graphics checkmark calendar icon in green circle

Construction Plan & Draft

In order to be successfully approved for a construction loan, you’ll need to create a thorough construction plan. Lenders will want to see that you’ve done all the research regarding land permits and other construction details. It may be worthwhile to get a professional to draft a proper construction plan. Having a detailed plan handy can also be useful for hiring and negotiation with a contractor

HOME APPRAISAL - photo graphics house icon in a green circle

Home Appraisal

The amount of money you’ll get for the construction project depends on how much the future property will be worth. The lender will likely do the appraisal themselves, but you may want to get an estimate for your own planning and preparation.

PLAN & PREPARE IN ADVANCE - photo graphics note icon in a green circle

Plan & Prepare In Advance

Start compiling all of these documents as soon as possible to ensure that you have the best chance at being approved for a construction loan. Furthermore, see if you can improve your credit score before your application to secure lower interest rates. Finally, consider getting pre-qualified for the loan to potentially lock in a good rate.

Top Construction Loan Lenders of 2024

One of the best ways to afford a construction loan is through the government, specifically through the FHA— Federal Housing Administration. The FHA offers subsidized construction loans with lower interest rates and smaller down payments between 3.5-10%. Furthermore, the FHA has more lenient credit score requirements. You can get approved even with a credit score as low as 580.

In addition to the government, there are plenty of other lenders that issue construction loans. Banks, credit unions and home mortgage companies can provide a range of construction loans. Some of the most reputable lenders include Wells Fargo, Valley Bank, Garden State Home Loans and U.S Bank. Be sure to research the individual requirements of every lender.

TOP CONSTRUCTION LOAN LENDERS OF 2024 - photo graphics stack of coins holding check

Are you looking to apply for a construction loan in 2024?

Loan Consulting Pro can help!

Loan Consulting Pro is a digital lending service and loan consulting network that works with dozens of experts in the industry to provide our clients with the lowest possible rates. Contact us today to get started with your construction loans application.

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