10 Best Construction Loan Lenders of December 2024

What type of loan is best for building a house?

While a traditional mortgage finances buying an existing home, a construction loan provides money for building a house. Construction loans tend to have shorter terms and higher interest rates than traditional mortgages. The lender pays the loan proceeds in installments to the contractor as building progresses. Once the home is completed, the construction loan is paid in full or converted to a permanent mortgage.

» MORE: How much does it cost to build a house?

Types of construction loans

There are a few types of home construction loans:

• A construction-to-permanent loan, also known as a "single-close" construction loan, becomes a permanent mortgage when the home is complete. During the construction phase, you may be able to make interest-only payments, keeping your costs lower while you're still living elsewhere. Since this type of loan combines a construction loan with a traditional mortgage, you only need to shop for a loan and pay closing costs once. 

• A construction-only loan, also known as a "two-close" loan, is paid off when building is finished. Unless you have ample cash to pay off the loan, you'll need to shop for a traditional mortgage during the building process. These loans tend to be pricier overall because with two closings, you'll pay many of the closing costs and fees twice. 

• Renovation construction loans include the cost of major renovations in the mortgage. The total loan amount is based on the value the home will have once the construction work is done.

Is a construction loan harder to get than a mortgage?

Getting approved for a construction loan is generally more difficult than getting approved for a traditional purchase mortgage because there isn't a completed house to secure the loan during the building phase. You're going to need solid finances and possibly a hefty down payment.

If you are buying a home that's being built by a developer, rather than a builder you've hired on your own, the developer will likely offer you either direct financing or a loan through a lender they've partnered with. While working with the developer's preferred lender may make parts of the process easier, it's worth shopping different construction loans to make sure that you couldn't get a better deal elsewhere. Sometimes, developers will offer incentives that are only available if you work with their preferred lender. But if you'd get a significantly better interest rate from a different mortgage lender, you might decide to go your own way.

What is the lowest down payment for a construction loan?

Mortgage lenders often require down payments of 20% for construction loans. Depending on how much you're borrowing, the type of loan you're using and your finances, that amount could vary. That goes up as well as down — a lender could potentially ask for a down payment that's even higher than 20%.

» MORE: How much do you really need for a down payment?

What is a good credit score for a construction loan?

The credit score required for a construction loan will vary depending on the type of loan you're trying to get. Some lenders may require a credit score of at least 700. If you're using a government-backed loan, like an FHA 203(k) loan, the credit score requirement should be lower.

But it's important to remember that even though government agencies issue overall minimum credit scores for their loans, lenders can set their own standards. For example, even though the Federal Housing Administration says you could get an FHA 203(k) loan with a credit score of at least 500, a lender may ask for a higher score.

How to apply for a construction loan

Getting a construction loan has a few additional steps that aren't part of getting a mortgage. Here's a quick overview of what to expect.

1. Find a builder

In order to get a construction loan, you're going to need to work with a reputable builder. When you're applying for the loan, the lender will check the builder's licensing, credit, references and more. You'll also need the builder to provide construction information like blueprints, an overall budget and a construction schedule.

If you intend to be your own contractor and build the home yourself, you may need a slightly different type of construction loan known as an owner-builder loan or a self-build loan. These aren't for the average DIYer: Lenders will seek substantive proof that you're up to the task, including licensing and experience.

2. Compare construction loan lenders

Shop for a construction loan lender that will suit your needs. Check out potential lenders that offer the type of loan you're seeking, competitive interest rates and terms that work for your schedule and finances.

You'll want to apply for preapproval with lenders that interest you, to see how much you may be able to borrow and what interest rate you may be offered. Bear in mind that in addition to the usual documentation (such as pay statements and tax returns), you'll also likely need to provide information like building plans and references for your builder.

3. Get homeowners insurance

Yes, you're going to need homeowners insurance even though the home isn't built yet. Lenders will generally require that builder's risk insurance is included in the policy, which covers the materials and structure during construction.

Once you've got these pieces in place and you feel confident about your choice of lender, you'll be ready to apply for a construction loan.

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