How much down payment is needed for a construction loan?

Conventional construction lenders may require approximately 10 to 20 percent or more. FHA, VA and USDA programs may offer lower or no-down-payment options to eligible borrowers.

How to Finance a New Construction Home in the USA

Q: Do I make mortgage payments during construction?

Many borrowers make interest-only payments based on the amount already drawn. Some programs may include an interest reserve or different payment arrangement.

Financing a new construction home in the USA can be more complicated than obtaining a mortgage for an existing property. The right financing method depends on whether you are buying a completed house from a developer, purchasing a home that is still being built or hiring a contractor to construct a custom home on your land.

If a builder completes and finances the house until closing, the buyer may be able to use a regular conventional, FHA, VA or USDA purchase mortgage. If the buyer owns the land and hires a contractor, a construction loan will usually be needed to pay for labor, materials, permits and other building expenses before the house is ready for occupancy.

Construction financing also involves risks that are not present in an ordinary home purchase. The project can exceed its budget, materials can become more expensive, work can be delayed and the finished home may appraise below the expected value. Lenders manage these risks by reviewing the borrower, builder, plans, budget, land and construction schedule.

Quick answer: The simplest way to finance a new construction home is to purchase a completed or nearly completed property from a builder using a standard mortgage. For a custom home, a construction-to-permanent loan is often the most convenient option because it combines construction financing and the final mortgage into one loan with one closing.

Ways to Finance a New Construction Home

There are several ways to finance a newly built home. The correct option depends on who owns the land, who carries the construction costs and whether the house is complete when the buyer closes.

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Financing Method	Best For	Main Advantage	Main Risk
Standard purchase mortgage	A completed or nearly completed builder-owned home	Simpler process similar to buying an existing home	Builder deposits and upgrades may become nonrefundable
Construction-to-permanent loan	A custom home financed from construction through occupancy	One application and usually one closing	Rate-lock and builder requirements may be restrictive
Construction-only loan	A borrower who wants separate permanent financing	Freedom to shop for a different mortgage after completion	Requires a second approval and second closing
FHA construction-to-permanent	Eligible borrowers needing lower down-payment options	FHA-insured financing with one-time-close structures available	Mortgage insurance and lender overlays apply
VA construction loan	Eligible veterans, service members and surviving spouses	VA does not generally require a down payment or monthly PMI	Participating construction lenders can be difficult to find
USDA single-close loan	Eligible borrowers building in qualifying rural areas	Potential 100% financing for qualified applicants	Income, location, property and lender rules apply

Construction-to-Permanent Loans

A construction-to-permanent loan combines the temporary building loan and long-term mortgage into one transaction. It is also called a single-close or one-time-close construction loan.

The loan closes before construction begins. The lender releases funds to the builder in stages as work is completed. After the home passes final inspections and receives the required occupancy approval, the loan converts or modifies into permanent mortgage financing.

Advantages

Only one complete mortgage application
One set of closing costs in many programs
Reduced risk of failing to qualify for a second mortgage
Permanent financing can be arranged before construction begins
Land purchase and construction may be combined

Potential Disadvantages

The permanent rate may need to be locked for a long period.
Extended rate locks can involve additional costs.
The lender may restrict which builders can be used.
Major plan or budget changes may require approval.
A delay can require a loan extension or modified terms.

Construction-Only Loans

A construction-only loan finances the building period but must be repaid after the house is complete. The borrower normally obtains a separate permanent mortgage to pay off the construction balance.

This structure is sometimes called a two-close construction loan because the borrower closes once on the construction financing and again on the permanent mortgage.

A construction-only loan may be useful when the borrower expects mortgage rates to fall or wants to compare permanent mortgage lenders after the house is finished. However, the borrower must qualify again based on future income, credit, debt and appraisal conditions.

Important risk: If the borrower loses employment, takes on new debt or experiences a credit-score decline during construction, qualifying for the permanent mortgage may become more difficult. A lower-than-expected final appraisal can also create a funding gap.

Builder and Developer Financing

Many production builders finance construction themselves and sell the property to the buyer when it is complete. In this situation, the buyer usually does not need a construction loan. The buyer obtains a standard purchase mortgage and closes when the home is ready.

A builder may operate an affiliated mortgage company or offer incentives for using a preferred lender. Incentives can include closing-cost credits, temporary rate buydowns, upgrade allowances or discounted mortgage rates.

Builder incentives can be valuable, but they should not be evaluated in isolation. Compare:

The sale price of the home
The mortgage interest rate and annual percentage rate
Discount points and lender fees
Closing-cost credits
Upgrade prices
Rate-lock protection
Cancellation and deposit-refund terms

A preferred lender may offer a large credit while charging a higher interest rate or a higher origination fee. Request Loan Estimates from outside lenders before deciding.

Government-Backed New Construction Financing

FHA Construction-to-Permanent Loans

FHA-insured construction-to-permanent financing combines the construction phase and permanent mortgage through a single closing before construction begins.

FHA financing may allow a down payment as low as 3.5% for an eligible borrower, although lenders offering construction financing may impose higher credit, reserve or builder requirements than the basic FHA minimums.

The borrower must generally contract with an acceptable licensed builder, and the completed property must satisfy FHA requirements. FHA mortgage insurance applies and increases the monthly and upfront cost of the loan.

VA Construction Loans

The VA home loan benefit can be used to build a home that the eligible veteran or service member will occupy as a primary residence. VA guarantees part of the loan made by a private lender.

VA does not generally require a down payment, and VA financing does not require private mortgage insurance. However, a funding fee may apply unless the borrower qualifies for an exemption.

Not every VA lender offers construction financing. Borrowers may need to contact several lenders or use a two-step approach in which a construction loan is later refinanced into a VA permanent mortgage.

USDA Single-Close Construction Loans

The USDA Single Family Housing Guaranteed Loan Program supports single-close construction-to-permanent financing for eligible borrowers and properties in qualifying rural areas.

The program may provide 100% financing for applicants who satisfy income, occupancy, credit and property requirements. The home must be used as the borrower’s primary residence.

USDA maintains information about active lenders offering its single-close construction product. Availability can vary by state, builder and lender.

New Construction Interest Rates and Closing Costs

There is no single national construction-loan rate. Rates depend on the borrower, lender, loan structure, project location, down payment, construction period and permanent mortgage terms.

As of July 2, 2026, Freddie Mac reported that the average conventional 30-year fixed-rate mortgage was 6.43%, while the average 15-year rate was 5.79%.

These figures are useful permanent-mortgage benchmarks, but construction-phase rates are normally higher because the lender is financing an unfinished property and administering inspections and draws.

Fixed and Variable Rates

A construction-only loan may carry a variable rate that changes with an index. A construction-to-permanent loan may offer a fixed permanent rate, an adjustable rate or an extended rate lock.

Ask the lender:

Is the construction rate fixed or variable?
When is the permanent mortgage rate established?
How long does the rate lock last?
What happens if construction exceeds the lock period?
Is a float-down option available if market rates decline?
Are points required to obtain the quoted rate?

Closing Costs

Mortgage closing costs commonly range from approximately 2% to 5% of the purchase price, excluding the down payment. Construction financing may also include:

Construction appraisal fees
Plan and budget review fees
Draw-administration charges
Progress-inspection fees
Title updates
Survey and recording charges
Extended rate-lock fees
Builder’s risk insurance
Loan origination and underwriting fees
Prepaid taxes and homeowners insurance

Down Payments and Land Equity

Conventional construction loans commonly require more money upfront than ordinary mortgages. Depending on the lender, project and borrower, the required contribution may be approximately 10% to 20% or more.

A larger down payment can reduce the lender’s risk and may improve the rate, approval terms and monthly payment. However, buyers should avoid using all available cash for the down payment.

Set aside additional funds for:

Closing costs
Moving expenses
Appliances and furnishings
Landscaping
Utility connections
Change orders
Construction delays
Emergency savings

Can Land Count Toward the Down Payment?

If you already own the building lot, the lender may allow some or all available land equity to count toward the required contribution. The lender will order an appraisal and subtract any loan or lien secured by the land.

Illustrative Land-Equity Example

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Assume the land is appraised at $120,000 and has a remaining loan balance of $20,000. The available land equity is approximately $100,000.

If the proposed construction cost is $400,000, the total project cost is approximately $520,000 before closing costs and reserves. The lender may credit the $100,000 land equity toward the borrower’s required contribution, subject to its underwriting rules.

This example is for illustration only and does not represent a loan offer.

How to Qualify for New Construction Financing

Construction lenders evaluate both the borrower and the building project. Approval normally requires more documents than an ordinary mortgage.

Borrower Requirements

Stable and documentable income
Satisfactory personal credit
Acceptable debt-to-income ratio
Documented down-payment funds or land equity
Cash reserves for unexpected expenses
Consistent employment or self-employment history
Acceptable source of closing funds

Project Requirements

Architectural plans and specifications
Detailed construction budget
Signed building contract
Construction timeline
Building permits or evidence they can be obtained
Land survey and title information
As-completed appraisal
Builder’s risk insurance

Builder Requirements

The lender may review the builder’s license, insurance, financial condition, experience, references and history of completing similar homes. Many lenders will not approve a true owner-builder unless the borrower is an experienced and licensed contractor.

How the Construction Draw Schedule Works

Construction loan funds are released through draws rather than one upfront payment. The loan agreement divides the project into stages.

A typical draw schedule may include:

Land purchase or initial site preparation
Foundation completion
Framing and roofing
Plumbing, electrical and HVAC rough-ins
Insulation and drywall
Cabinets, flooring and interior finishes
Final inspection and certificate of occupancy

The builder submits a draw request after completing a stage. The lender orders an inspection and may require invoices, lien waivers and updated title information before releasing funds.

During construction, borrowers commonly make interest-only payments based on the amount already advanced. The payment usually increases as more funds are drawn.

How to Finance a New Construction Home Step by Step

Step 1: Decide What Type of Home You Are Building

Determine whether you are buying a builder-owned home, building on your own land or purchasing land and construction together. This decision determines whether you need a standard mortgage or a construction loan.

Step 2: Calculate the Complete Project Cost

Include land, site preparation, plans, permits, construction, utility connections, landscaping, closing costs and reserves. Do not base the financing decision only on the builder’s base price.

Step 3: Review Your Credit and Cash

Check your credit reports, reduce unnecessary debt and document the source of your down payment. Avoid opening new credit accounts before or during construction.

Step 4: Compare Construction Lenders

Not every mortgage lender offers construction financing. Compare local banks, credit unions, mortgage companies and government-program lenders.

Step 5: Obtain Preapproval

A preapproval helps establish the likely loan amount, but final approval still depends on the plans, builder, budget and appraisal.

Step 6: Select the Builder Carefully

Confirm licensing, insurance, references, warranties and previous projects. The lender must normally approve the builder before closing.

Step 7: Finalize Plans and the Construction Contract

The contract should state the price, allowances, payment schedule, completion target, change-order process, warranty obligations and responsibility for overruns.

Step 8: Complete the Appraisal and Underwriting

The appraiser estimates the home’s value after completion. The lender reviews the borrower’s finances and confirms that the budget can reasonably complete the house.

Step 9: Review the Loan Estimate

Compare the interest rate, annual percentage rate, closing costs, cash to close, mortgage insurance, prepayment terms and projected payments with competing offers.

Step 10: Close and Begin Construction

After closing, funds are placed under the lender’s draw-control process. Construction should not begin before the lender authorizes the project.

Step 11: Complete Final Inspections

The lender may require a final inspection, certificate of occupancy, lien releases and proof of permanent homeowners insurance.

Step 12: Convert to Permanent Financing

With a single-close loan, the construction balance converts into the permanent mortgage. With a construction-only loan, the borrower closes on a separate mortgage that pays off the temporary loan.

Common New Construction Financing Mistakes

Underestimating the final cost: Upgrades, utility work and landscaping can significantly increase the budget.
Choosing a builder before speaking with lenders: The preferred lender may not approve that builder or contract.
Ignoring rate-lock expiration: A delay can result in extension charges or a different mortgage rate.
Using all savings at closing: Construction projects require emergency reserves.
Making large credit purchases: New vehicles, furniture or credit cards can affect final approval.
Failing to compare builder financing: A large incentive does not automatically mean the loan is cheaper.
Signing an unclear contract: Allowances and change orders should be documented.
Assuming the appraisal will equal cost: The completed market value may be lower than the project budget.

Frequently Asked Questions

Can I use a regular mortgage to buy a new construction home?

Yes. If the builder finances construction and the house is completed before closing, the buyer can usually use a standard purchase mortgage.

What is the best loan for building a custom home?

A construction-to-permanent loan is often the most convenient because it combines the building loan and final mortgage into one transaction.

How much down payment is needed?

Conventional construction lenders may require approximately 10% to 20% or more. FHA, VA and USDA programs may offer lower or no-down-payment options to eligible borrowers.

Can I use my land as the down payment?

Yes. Many lenders allow available equity in an owned building lot to count toward the required borrower contribution.

Do I make mortgage payments during construction?

Many borrowers make interest-only payments on the amount already drawn. Some programs include an interest reserve or defer scheduled payments during part of construction.

Can I act as my own builder?

Owner-builder financing is limited. Many lenders require an experienced licensed general contractor and will not approve a borrower without professional construction experience.

Does the lender pay the builder directly?

Funds are generally released through controlled draws. Depending on the lender, payment may go directly to the builder, title company or another approved construction-control party.

What happens if construction costs exceed the budget?

The borrower is usually responsible for cost overruns unless the lender approves additional financing. The lender may require the borrower to contribute extra cash before releasing later draws.

Is builder’s risk insurance required?

Construction lenders commonly require builder’s risk insurance to protect the unfinished structure and covered materials until permanent property insurance takes effect.

Can I change builders after the loan closes?

A builder change generally requires lender approval. The lender may need to review the replacement builder, contract, budget and construction timeline.

Bottom Line

The best way to finance a new construction home depends on who carries the cost of building. A completed builder-owned home can usually be financed with a standard mortgage. A custom home generally requires construction financing, with a construction-to-permanent loan offering the convenience of one application and one closing.

Eligible borrowers should compare conventional financing with FHA, VA and USDA construction programs. Interest rate, down payment and monthly payment are important, but buyers must also compare draw fees, rate-lock rules, builder requirements, mortgage insurance and the consequences of construction delays.

Before signing a building contract, obtain financing preapproval, confirm that the lender accepts the builder and prepare a complete budget with adequate reserves. Request Loan Estimates from multiple lenders and compare the total cost—not only the advertised interest rate.

This article provides general educational information and is not legal, tax, investment or mortgage advice. Interest rates, loan programs, fees and eligibility requirements change and vary by lender and location. Obtain current written terms from licensed lenders before purchasing land or signing a construction contract.