Construction Loan Down Payment
Up to 100% Financing
For residential builders
Interest Rate
10 - 13.25%
Origination fee
from 1.375%
Loan To Cost (LTC)
up to 90%
Construction Financing
up to 100%
Loan To ARV
up to 75%
Term
up to 24 months
Minimum Loan Amount
$100,000
Maximum Loan Amount
$5,000,000
Minimum FICO
650
Type of Property
Residential 1-4 units, condos, townhomes
How Much Is The Down Payment For A Construction Loan?
The typical down payment on a construction loan is between 10% and 20% of the total project cost.
The typical down payment on a construction loan is between 10% and 20% of the total project cost. Sometimes a down payment of over 20% can even be required on a construction loan. It’s important to note that the down payment on construction loans can vary extensively, depending on a few factors, but they are usually significantly higher than a traditional mortgage.
These factors include:
- The lender
- The type of construction loan
- The borrower’s financial situation and creditworthiness
The down payment on construction loans is typically due when the construction loan application is being done. The down payment will fill in the gap that the construction loan won’t cover. For example, a construction loan that covers 80% of the project will require a 20% down payment.
What Is Loan To Cost (LTC) And How Does It Affect The Down Payment?
Loan To Cost (LTC) is a key concept in real estate investing and it can significantly impact the down payment on construction loans. LTC refers to the ratio of the loan amount compared to the total cost of the construction project. All costs are considered in the calculation, from inspection fees to construction materials and permits.
LTC is expressed as a percentage and generally the higher the LTC, the more the lender is financing for home construction loans, and vice versa for a lower LTC. In other words, the higher the LTC, the lower your down payment will be, and the lower your LTC, the higher your down payment will be because the lender is financing less of the project.
For example, if you’re borrowing $800,000 for a construction project that costs $1 million in total, the LTC on home construction loans would be 80% ($800,000 / $1,000,000).
Typically, lenders will use the LTC ratio as a risk assessment tool on construction loans, which is quite different to a permanent mortgage. The lower the LTC ratio, the more a borrower is contributing financially towards the project and the lower the risk for the lender. As such, this may result in the lender offering the borrower better terms on construction loans.
What Is Loan To ARV And Does It Influence The Down Payment?
The Loan To ARV (After-Repair Value) is another important ratio, particularly for those doing construction projects. The Loan To ARV is a ratio that measures the percentage of the loan amount compared to the estimated value of the property once the construction phase is complete. This is calculated by dividing the loan amount by the estimated ARV.
For example, if a borrower is taking a loan of $200,000 for a property with an estimated ARV of $300,000 then the Loan To ARV would be $200,000 divided by $300,000, which is 66.67%.
A higher Loan To ARV ratio means that the lender is contributing a larger portion towards the property’s after-repair value, when it comes to construction loans. As such, a lower down payment may be required from the borrower. The converse is true for a lower Loan To ARV ratio on home construction loans. The ratio can influence the loan amount that a borrower is eligible for, and therefore impact the down payment significantly.
What Does Up To 100% Construction Financing Mean?
When a construction loan lender offers up to 100% construction financing for home construction loans, this means that they are willing to provide funding potentially for the entire construction project in their construction loans. Unlike a permanent mortgage, this means that a borrower may not be required to make any down payment for the project as the entire cost could be covered by the lender.
100% construction financing includes funding for materials, labor, permits, financing fees and more, in the construction process. Lenders who offer 100% construction financing on their home construction loans are likely to assess borrowers in a more stringent way, to ensure that they meet the criteria. This may mean a proven track record in construction, a detailed project scope and a strong credit history.
Does The Down Payment Cover The Cost Of The Land And The Building?
The down payment on a construction loan would cover a portion of the land and the building, depending on the construction loan structure, the project, and the lender. Lenders will have their own loan terms with regards to down payments, so in some cases the down payment could cover a portion of the land purchase, and in other cases, it could cover a portion of the construction process only, or even both.
If you are purchasing land as a part of the construction loan and you require funding for this, the lender may require a down payment for the land specifically. This can often be higher than the construction down payment.
However, in the case of a construction only loan, where the loan is only covering the construction phase, things work a little differently. The down payment for a construction only loan would typically be a percentage of the total construction phase cost.
How To Cover The Cost Of The Down Payment
Method 1: Personal Capital
For those who have saved enough or have enough capital on hand to cover the down payment on construction loans, this is a straightforward way to pay it quickly. Using personal capital is a good way to show a construction loans lender that you’re committed to the project enough to invest your own money.
Method 2: Property Equity
If you own other properties and have built up equity in these, you can use this to cover the down payment. Using either home equity loans or home equity lines of credit, you can tap into the equity you already have in real estate, and leverage this to fund the down payment on your next project.
Method 3: Partnership
Many people cannot afford a down payment for a real estate loan, so a financial partner can be a good solution for contributing towards the down payment. You can offer the financial partner a share of the profits that you will make from the project, as compensation for their initial financial outlay for the down payment.
Method 4: Crowdfunding
Using real estate crowdfunding can be an effective way to raise the funds you need for a down payment. This involves pitching the project to investors on a crowdfunding platform by outlining the project and the funds you need, and then investors grouping together to help fund your down payment. They may also require a portion of the project’s profits as compensation for financing your down payment.
Method 5: Use A Personal Loan
Using a personal loan, business loan or a credit card isn’t the cheapest way to cover your down payment for construction loans, but it is an option for those who need the funds and can’t find another way to cover it. These loan options come with high interest rates and will need to be paid off in a shorter period of time.
Method 6: Private Lender
Private lenders aren’t affiliated with any financial institution and can provide funding for your down payment with less stringent lending criteria than a traditional mortgage. They will also have flexible loan terms and may be more lenient with the timeframe in which the money should be repaid. This can be far more suited to real estate investors than a permanent mortgage.
Additional Resources
This Construction Loan Calculator quickly works out the maximum loan amount that you can qualify for when applying for a Construction Loan.
Find out the latest Construction Loan Rates here. This guide explores what rate you are likely to qualify for.
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