Most people associate a mortgage with buying a house, but a construction loan finances the home build, from purchasing the lot and paying for labor and materials to covering any permit fees.
CNBC Select has picked the best lenders for construction loans for affordability, low down payment, bad credit, fixer-uppers and other categories.
What is a construction loan?
A construction loan is a form of short-term financing used to pay for the building of a new home — everything from the plot to contractors, materials and permits.
Many construction loans only require interest payments during the building or remodeling phase, with payments on the principal not due until the project is done.
Construction loans that automatically convert into mortgages when the building phase is complete are known as construction-to-permanent or single-close construction loans, because you avoid having to pay closing costs twice.
There are also construction loans that can be used to purchase a fixer-upper or refinance the borrower's existing mortgage on an older house to pay for renovations.
Because there's no existing home to use as collateral, the interest rate on a construction loan is usually higher than on a conventional mortgage. Borrowers must also submit detailed plans, budgets and timetables and update the lender frequently.
Best lenders for construction loans
- Best for affordability: Connexus Credit Union
- Best for a fixer-upper: Flagstar Bank
- Best for construction-to-permanent loan: TD Bank
- Best for a longer construction period: Citizens Bank
- Best for a low down payment: Old National Bank
- Best for VA construction loan: VA Nationwide
- Best for bad credit: New American Funding
- Best for builder buydown options: Guild Mortgage
Best for affordability: Connexus Credit Union
Connexus Credit Union Mortgage
Types of mortgages
Conventional, VA, jumbo, construction, refinancing, HELOC, home equity loan
Terms
15-, 20- and and 30-year fixed-rate loans; 3-year, 5-year, 7-year intro period for adjustable-rate loans
Minimum credit score
620 for conventional, 640 for VA, 700 for jumbo and construction loans, 640 for home equity loans and HELOCs
Minimum down payment
3% for conventional loans, 0% for VA, 10% for jumbo, 20% for construction loan
Membership requirements
$5 donation to the Connexus Association
Availability
Connexus offers mortgages and home equity products in all U.S. states except for Alaska, Hawaii, Maryland and Texas
Pros
- Fully online lending process
- Has construction-to-permanent loans with ARMs
- Available in all U.S. states except Alaska, Hawaii, Maryland and Texas
Cons
- Prefers 700 credit score
- $5 membership fee
- Only has branches in Illinois, Minnesota and Wisconsin
Who's this for? Because Connexus Credit Union is a member-owned nonprofit, its rates are typically lower than many competitors.
Type of construction loan: Construction-to-permanent
Standout features: In addition to a fixed-rate option, borrowers can choose from one of three adjustable-rate construction-to-permanent loans, with an intro period of three, five or seven years.
Best for a fixer-upper: Flagstar Bank
- Provides grants of up to $15,000 for first-time homebuyers, making it a great option for those who may not have much saved up for a down payment or closing costs.
- Destination Home Mortgage allows qualified buyers to put 0% down, a rare no-down-payment loan option geared towards first-time homebuyers.
- Possible to close in as few as 15 days, meaning you'll get the keys to your new home in less than half the time it usually takes.
- Rates tend to be higher than industry average
- Home equity loans only available in nine states
Who's this for? Flagstar Bank issues Fannie Mae-backed HomeStyle Renovation Loans, which can be used to buy a fixer-upper and make the necessary repairs or as a refinance mortgage to upgrade your current property. Any leftover renovation money goes toward the mortgage principal.
Type of construction loan: Construction only, construction-to-permanent, FHA 203(k) standard and limited
Standout features: Flagstar approves construction loans of up to $4 million for building a primary residence.
Best for construction-to-permanent loan: TD Bank
TD Bank Mortgage
Types of mortgages
Conventional, VA, FHA, jumbo, construction-to-permanent, physician loans, TD Right Step, TD Home Access, refinancing, home equity loans, HELOCs
Terms
Up to 30 years
Minimum credit score
620 for conventional, 500 for FHA
Minimum down payment
0% for VA loan, 3% for TD Right Step Mortgage®, TD Home Access Mortgage®, FNMA HomeReady®, 3.5% for FHA loan, 20% for jumbo
Availability
TD Bank offers home loans in 15 East Coast states and Washington, D.C.
Terms apply.
Pros
- Mortgages with 3% down and no PMI
- $10,000 lender credit
- Specialized mortgages for physicians
- Offers HELOC and home equity loans
Cons
- Higher-than-average rates
- Doesn't offer USDA loans
- Not available in all states
Who's this for? TD Bank offers construction-to-permanent mortgages for primary, secondary and vacation homes with fixed or adjustable rates.
Type of construction loan: Construction-to-permanent, owner-builder
Standout features: If you already have a loan on the property, the first disbursement pays it off before construction starts. TD Bank approves construction loans up to $3 million with a 30% down payment.
Best for a long construction period: Citizens Bank
- Existing Citizens customers are eligible for a rate discount meaning you could save hundreds or thousands over the life of the loan if you already have a bank account.
- High rating for customer satisfaction by J.D. Power, so you know you're getting great service through the application process.
- Borrowers can earn up to $9,500 by buying their home through HomeStory, making it a great option for those who need extra cash to replenish their savings after they sign their deed.
- You can easily compare Citizens to other lenders you're considering with its rate information available online
- Rates may be higher than competitors
- Rate discount only available in select states
Who's this for? Citizens Bank lets borrowers take up to 18 months to complete construction on their home — six months longer than most lenders.
Type of construction loan: Construction-to-permanent
Standout features: Existing Citizens customers may be eligible for a 0.125% rate reduction if you set up autopay.
Best for a small down payment: Old National Bank
Old National Bank Mortgage
Types of mortgages
Conventional, FHA, VA, USDA, jumbo, refinance, construction loan, professional loan, home equity loan, HELOC
Terms
8 to 30 years
Minimum credit score
620 for conventional and VA, 600 for FHA
Minimum down payment
3% for conventional, HomeReady and Home Manager, 3.5% for FHA, 0% with VA and USDA, 1% with ONB Down Payment Assistance
Availability
Old National Bank funds home loans in all 50 states and has branches in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Tennessee, and Wisconsin.
Pros
- Robust homebuyers assistance programs
- Nationwide availability
- Professional loans for physicians, veterinarians, dentists and professors
Cons
- Only eight states have retail locations
Who's this for? While most lenders require a down payment of 20% to 30%, Old National Bank will approve construction loans under $1 million with as little as 10% down.
Type of construction loan: Construction-to-permanent
Standout features: You can use the extended rate lock to freeze your rate for up to 360 days while you complete construction.
Best for VA construction loan: VA Nationwide Home Loan
VA Nationwide Home Loans
Annual Percentage Rate (APR)
Fixed-rate and adjustable-rate available, apply online for rates.
Types of loans
VA loans, VA construction loan, VA jumbo loan, VA manufactured loan, VA renovation
Terms
Apply for information on terms
Credit needed
640
Minimum down payment
0%
Pros
- Offers a ride range of VA loan types that few other lenders offer
- Offers VA construction loans
Cons
- Only offers VA loans
- Minimum credit score is on the high side
Who's this for? VA Nationwide is one of the few lenders that offers VA construction loans, which have the same perks as a VA loan, including relaxed credit guidelines and no down payment or PMI. Qualified borrowers can get approved for construction-only or construction-to-permanent loans.
Type of construction loan: VA construction loan
Standout features: Qualified borrowers may be eligible for up to $50,000 in additional funds before or at closing.
Best for bad credit: New American Funding
- Flexible credit requirements
- Helps buyers make all-cash offers
- Programs to increase minority homeownership
- Nationwide availability
- High fees
- Customized rates not available online
Who's this for? New American Funding will approve FHA construction-to-permanent loans and FHA 203 (k) rehab loans to lenders with a credit score as low as 500 and a DTI of up to 57%.
Type of construction loan: Construction-to-permanent, VA construction loan, FHA construction loan
Standout features: NAF construction loans come with a one-year rate lock.
Best for rate buydown by builder: Guild Mortgage
- Offers a wide range of uncommon loans, so you're more likely to find one that fits your needs than with other lenders.
- Boasts several down payment assistance programs, making it a great lender for first-time homebuyers who may not have much saved up for a down payment.
- Some loans closes can receive a 17 day closing guarantee, which can ensure you get the keys to your home in quicker than half the average timeline.
- E-closings available so you may be able to finalize your mortgage paperwork from your couch.
- Rates are not available online
- Does not issue mortgages in New York
Who's this for? Guild Mortgage's StrongStart program allows a builder to pay a buyer's interest for up to the first five months. Builders can also temporarily or permanently buy down your rate and lower your payments for the first few years or the life of your mortgage.
Types of construction loans: Construction-only, construction-to-permanent, FHA 203(k) standard and limited
Standout features: Guild's Builder Extended Rate Lock Program freezes your mortgage rate for 360 days while the home is being built.
Construction loan vs. traditional mortgage
A construction loan isn't paid out by the lender in one lump sum like a purchase mortgage, but rather through a series of draws paid to the contractor as work progresses. In the building phase, borrowers only have to make interest payments — and only on funds drawn to date.
You can take out a construction loan only to fund the building phase or one that converts into a conventional mortgage when construction is over.
Construction loans can also be used to buy or refinance a fixer-upper and pay for renovations.
| Conventional mortgage | Construction loan | |
|---|---|---|
| Minimum credit score | 620 | 680 |
| Minimum down payment required | 5% | 20% to 25% |
| Funding | Lump sum | Draw schedule over the course of the project |
| Term length | 10 to 30 years | 12 to 18 months |
| Purpose | Pays for purchase of existing home | Pays to build new home or renovate existing property |
Types of construction loans
There are construction loans for different kinds of borrowers and projects.
Construction-only loan
A construction-only loan finances just the building of the home. The principal is due in full once construction is done and can be settled with cash or a standalone mortgage. That means two sets of closing costs, however, which can be as much as 5% each.
Construction-to-permanent loan
When the building phase is over, a construction-to-permanent loan automatically converts into a conventional mortgage, usually with a 15- or 30-year term. So there's just one set of closing costs, which is why they're also known as "one-time close construction loans."
FHA construction loan
You can be approved with a credit score of 500 if you put 10% down, or 580 if you only put 3.2% down. The chief sticking point is that the loan amount can't exceed FHA loan limits.
VA construction loan
Service members, veterans and their families can be approved for a construction-only or a construction-to-permanent loan. In either case you'll likely have a lower interest rate and no down payment.
USDA construction loan
These are construction-to-permanent loans backed by the USDA, so borrowers enjoy lower rates, flexible credit requirements and often no down payment. But you must meet income requirements, build in a USDA-approved rural or suburban area and work with a USDA-approved contractor. There are very few lenders offering USDA construction loans.
FHA 203(k) rehab loan
If you're not keen on building from the ground up, a renovation mortgage rolls the cost of a home purchase and remodeling into one fixed-rate mortgage backed by the Federal Housing Administration.
A 203 (k) rehab loan is intended for someone who plans to live in the house, not an investor or flipper. You can apply for a limited 203(k) rehab loan for repairs costing under $75,000 or a standard 203(k) loan for a bigger project.
Fannie Mae's HomeStyle renovation loan and Freddie Mac's single-family renovation mortgage also combine purchasing and renovations, and some private lenders have their own versions.
Owner-builder construction loan
If you're the DIY type, an owner-builder loan is a construction loan where the borrower also acts as the builder. These are rare and lenders will typically only approve an owner-builder loan with a borrower who is a licensed contractor.
| Type of loan | How it works | Typical repayment term | Pros | Cons |
|---|---|---|---|---|
| Construction-only loan | Finances new build with loan due in full at completion | 12 to 18 months | Might get better terms with the new mortgage | Two loans and two sets of fees |
| Construction-to-permanent loan | Converts into mortgage after construction | 10 to 30 years | Single loan | More in-depth underwriting process |
| FHA 203(k) loan | Rolls FHA mortgage and rehab costs into a single loan | 9 to 12 months | Low credit score and down payment requirements | Must be done in six months, can't be used on pool or other "luxuries. |
| FHA construction-to-permanent loan | Converts into FHA loan after construction | 30 years | More flexible approval requirements | Mortgage insurance premiums, must use FHA-approved contractor and get new construction warranty |
| USDA construction loan | Converts into USDA loan after construction | 30 years | Streamlined application, no down payment | Income and location requirements, USDA-approved contractor required |
| VA construction loan | Finances new build for service member or veteran | 30 years | No down payment or mortgage insurance required | Hard to find |
| Owner-builder construction loans | Finances home build where borrower is also the general contractor | 12 months | Can have more control over process and costs | Harder to get approval, may face cost overruns |
Pros and cons of a construction loan
- Finances ground-up home builds
- Can fund home renovations
- Can convert to a conventional mortgage after construction
- Shorter terms than traditional mortgages
- Licensed contractor required
- Often a larger down payment
Alternatives to construction loans
If you need money for building or remodeling and don't want to take out a construction loan, you have some options.
Home equity loan: A one-time lump sum payment backed by equity in your home. Borrowers pay back the funds (with interest) over a period of up to 30 years. Interest on the loan is tax-deductible if you use the funds on home improvements.
Home equity line of credit: Similar to a home equity loan, a HELOC is a revolving line of credit backed by the value of your home. During the draw period (usually 10 years), you can take out whatever you need up to your credit limit and only make interest payments. When the draw period ends, you begin repaying both the principal and interest.
Home improvement loan: If you want to remodel but don't have much equity, a home improvement loan is a personal loan used for renovations or repairs. The amounts can range from $1,000 to $100,000, with terms of up to seven years.
Cash-out refinance: This is a refinance mortgage for more than your original home loan. After paying off your mortgage, you can take the remainder as cash to fund your home renovation project.
Construction loan FAQs
How do construction loans work?
With a construction loan, the lender pays the builder incrementally as work progresses. An appraiser will usually check in during different stages to approve additional disbursements.
What's the best credit score for a construction loan?
Most lenders want a credit score of at least 680 for a construction loan, with some requiring a 720. FHA construction loans have more generous requirements, with lenders willing to accept a FICO score of 500 with a 10% down payment.
Can you get a construction loan if you act as your own general contractor?
Yes, it is possible to get a construction loan if you're acting as your own general contractor, but you'll need to demonstrate serious experience as a builder, including detailed plans for the build, and, possibly, a contractor's license and insurance. Owner-builder construction loans are not offered by all lenders.
Is a construction loan harder to get than a mortgage?
Construction loans typically require higher credit scores and larger down payments than conventional mortgages and come with higher interest rates. There is also the risk of cost overruns as the construction phase continues.
How do I get a construction loan with no money down?
VA construction loans and USDA construction loans are both zero-down options. But they both have strict eligibility requirements: Only service members, veterans and their families can be approved for VA loans, while USDA loan borrowers must meet income and location requirements and work with contractors approved by the U.S. Department of Agriculture.
What's the difference between a construction loan and a renovation loan?
A construction loan is a form of short-term financing intended to help with the building of a new home or cover major renovations for an existing property. Because the project carries more risk, construction loans typically require a down payment of at least 20%. Renovation loans pay for home improvements and, while they require a smaller down payment, they generally have higher interest rates and shorter repayment terms.
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Our methodology
CNBC Select analyzed dozens of lenders across the country to determine the best for construction loans, . which we defined as financing the building of a new home or the purchase or refinancing of an existing home to renovate or repair.
We focused on the following features:
- Types of construction loans offered: We examined loan offerings, including whether a lender offered construction-to-permanent loans, construction-only loans and renovation loans.
- Fees: We evaluated origination fees, application fees, underwriting fees, processing fees, and administrative fees, among other features, when determining each lender's overall offer.
- Minimum and maximum loan amounts: Each mortgage lender provides a variety of financing options with customization based on your monthly budget and how long you need to repay your loan.
- Payoff penalties: None of the mortgage lenders on our list charge borrowers for paying off the loan early.
- Streamlined application process: We considered whether lenders offered a convenient, fast online application process and/or an in-person procedure at local branches.
- Customer support: Every mortgage lender on our list provides customer service via telephone, email or secure online messaging. We also opted for lenders with an online resource hub or advice center to help you educate yourself about the personal loan process and your finances.
We also considered CNBC Select audience data when available, such as general demographics and engagement with our content and tools.
Based on these criteria, our picks for the best lenders for construction loans are:
- For affordability: Connexus Credit Union
- For fixer-uppers: Flagstar Bank
- For construction-to-permanent loan: TD Bank
- For a longer construction period: Citizens Bank
- For a low down payment: Old National Bank
- For VA construction loan: VA Nationwide
- For bad credit: New American Funding
- For builder buydown options: Guild Mortgage
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