Most people can’t afford to design and build their own home or pay for major renovations out of pocket, which is why many lenders offer construction loans — shorter-term loans used to finance construction/rehabilitation of or addition to a residence. Here is Bankrate’s guide to the best construction loan lenders in 2023.

Best construction loan lenders

Cardinal Financial

Cardinal Financial mortgage review

Availability Available in all U.S. states
Loans offered Conventional, jumbo, FHA, VA, USDA, fixed-rate; rate-and-term refinancing
Credit requirements 580 for conventional loans, 550 for FHA loans
Down payment minimum Varies
Where to find Online only

 

 

Cherry Creek Mortgage

Cherry Creek mortgage review

Availability Available in 43 states; not available in Alaska, Hawaii, Massachusetts, New York, Rhode Island, Vermont, Virginia and Washington, D.C.
Loans offered Conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term and cash-out refinancing; construction and renovation loans; reverse mortgage
Credit requirements 620 for conventional loans; 700 for jumbo loans; 620 for FHA loans; 620 for VA loans; 640 for USDA loans
Down payment minimum Varies
Where to find Online or in person

Garden State Home Loans

Garden State Home Loans review

Availability Available in Connecticut, Delaware, Florida, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Pennsylvania, Tennessee, Texas and Virginia.
Loans offered Conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term and cash-out refinancing; home equity loan; construction and renovation loans; debt service coverage ratio (DSCR) loans; non-QM
Credit requirements 640 for conventional loans
Down payment minimum Varies
Where to find Online or in person

LowRates.com

LowRates.com mortgage review

Availability 48 states (not Georgia or Massachusetts)
Loans offered Conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term, cash-out and streamline refinancing; home equity line of credit (HELOC), home equity loan; construction and renovation loans; investment property; reverse mortgage
Credit requirements 620 for conventional loans; 620 for jumbo loans; 500 for FHA loans; 500 for VA loans
Down payment minimum Varies by loan type
Where to find Online

NBKC Bank

NBKC Bank mortgage review

Availability All U.S. states
Loans offered Conventional, jumbo, FHA, VA, fixed-rate, adjustable-rate; rate-and-term, cash-out and streamline refinancing; home equity line of credit (HELOC), home equity loan; construction and renovation loans
Credit requirements 620 for conventional loans; 680 for jumbo loans; 620 for FHA loans; 620 for VA loans
Down payment minimum Varies by loan type
Where to find NBKC has just a few branches.

Reliant Home Funding

Reliant Home Funding review

Availability Available in Colorado, Connecticut, Delaware, Florida, Georgia, Louisiana, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington and Washington, D.C.
Loans offered Conventional, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term, cash-out and streamline refinancing; construction and renovation loans; flex-term; reverse mortgage
Credit requirements 620 for conventional loans; 500 for FHA loans; 700 for adjustable-rate mortgages; 620 for renovation loans
Down payment minimum Varies by loan type
Where to find Online or by app

 

 

U.S. Bank

U.S. Bank mortgage review

Availability All states
Loans offered Conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term, cash-out and streamline refinancing; home equity line of credit (HELOC), home equity loan; construction and renovation loans; investment property; interest-only
Credit requirements 620 for conventional loans; 740 for jumbo loans
Down payment minimum Varies by loan type
Where to find Online or at branches

Valley National Bank

Valley National Bank mortgage review

Availability Available in all states
Loans offered Conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term and cash-out refinancing; home equity line of credit (HELOC), home staging line of credit; construction and renovation loans
Credit requirements Varies by loan type
Down payment minimum Varies by loan type
Where to find Online or at branches in four states

Wells Fargo

Wells Fargo Home Mortgage review

Availability Available in all states
Loans offered Conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term and cash-out refinancing; construction and renovation loans; investment property
Credit requirements 620 for conventional loans
Down payment minimum Varies by loan type
Where to find Online or at branches

Summary: Best construction lenders

Lender Credit requirements Down payment minimum Bankrate review
Cardinal Financial 580 for conventional loans, 550 for FHA loans Varies Cardinal Financial mortgage review
Garden State Home Loans 640 for conventional loans Varies Garden State Home Loans review
LowRates.com 620 for conventional loans; 700 for jumbo loans; 500 for FHA and VA loans 3% for conventional loans; 3.5% for FHA loans; none for VA or USDA loans LowRates.com review
NBKC Bank 620 for conventional loans; 680 for jumbo loans; 620 for FHA loans; 620 for VA loans Varies by loan type NBKC Bank review
Reliant Home Funding 620 for conventional loans; 500 for FHA loans; 700 for adjustable-rate mortgages; 620 for renovation loans Varies by loan type Reliant Home Funding review
U.S. Bank 620 for conventional loans; 740 for jumbo loans Varies by loan type U.S. Bank review
Valley National Bank Varies by loan type Varies by loan type Valley National Bank review
Wells Fargo Home Lending 620 for conventional loans Varies by loan type Wells Fargo Home Lending review

Construction loan requirements

Construction loan lenders have varying requirements, but they are typically based on the amount you borrow. Similar to other types of mortgages, your lender determines your eligibility for a construction loan by evaluating your creditworthiness, income, debt-to-income (DTI) ratio and other factors:

  • Credit score – Most lenders require a credit score of 680 or higher, but some might work with borrowers with lower credit scores.
  • DTI ratio – Lenders usually look for your debt obligations to total no more than 45 percent of your monthly income.
  • Down payment – A down payment between 20 percent and 30 percent is usually required, although some government loan programs might require less.
  • Construction plan – Lenders usually require a detailed plan before funding the first phase of the project.
  • Repayment plan – In addition to the construction loan itself, you must also qualify for permanent mortgage financing. The construction loan covers payments for the project during the building process and then converts to a permanent mortgage upon completion.

Generally speaking, mortgage lenders tend to have tighter restrictions for construction loans because the asset (the home) doesn’t exist yet.

Types of construction loans

  • Construction-to-permanent loan – A loan to pay for construction costs, which then converts to a permanent mortgage once the home’s finished and ready for occupancy
  • Construction-only loan – A loan to pay for construction costs by disbursing funds in increments as project milestones are met; generally has a repayment period of one year or less
  • Owner-builder construction loan – A loan that operates like a construction-to-permanent or construction-only loan, but with one key difference: the borrower is also the builder
  • End loan – The mortgage on the property once construction is complete

What are construction loan interest rates?

Construction loan interest rates are generally higher than the mortgage rates for standard home purchases, in part because in a build situation, there’s no home (yet) to secure the construction loan against, making it riskier for the lender to offer.

Construction loan vs. renovation loan

A construction loan is a short-term loan designed to help with the purchase of a plot of land and the construction of a home or pay for major renovations to an existing home.

A builder or borrower typically takes out a construction loan to cover the cost of building the house before securing a standard mortgage. The lender pays the builder in installments that follow each phase of construction. Before the completion of the project, borrowers usually only make interest payments and repay the loan once construction is complete.

Renovation loans, on the other hand, give homeowners access to funds to pay for home improvements. This funding can come in a variety of forms, such as a personal loan or a government-insured loan, or by taking out equity in your home. Overall, renovation loans aren’t as structured as construction loans; they’re usually unsecured, and borrowers have more options when it comes to accessing funds.

How to choose the best construction loan lender

Construction loans can be complex, which is why it’s best to work with a lender who has experience with this type of mortgage. Procedures and policies differ from lender to lender, so look for one that can feasibly work with your timeline and needs.

To find the best mortgage lender and get the lowest-cost loan, compare several construction loan lenders and their rates and terms, and also compare your interactions with them. If you’re looking for responsiveness, for example, take note of this in your communications with the loan officer. Ultimately, the best lender for you depends on your unique goals, preferences and financial situation.

How to apply for a construction loan

To apply for a construction loan, you’ll need to provide the lender with your employment history and financial information, including your income, assets and debts, as well as your contract with the architect or builder and their plans for the project. These plans should specify the total estimated cost to build so that the loan amount can be credibly established. Once your application is submitted, be prepared to answer any questions your lender might have and provide any additional documentation as needed. This will help expedite the underwriting and approval process and keep things on track.

Methodology

To determine the best construction loan lenders, Bankrate evaluated lenders based on several criteria, including affordability (annual percentage rate and fees); expediency (approval and closing times); and experience (including customer service support).