Most people can’t afford to design and build their own home or pay for major improvements out of pocket, which is why many lenders offer construction loans — shorter-term loans used to finance the building or rehabilitation of a home. Here is Bankrate’s guide to the best construction loan lenders in 2021.
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).
Best construction loan lenders
Specializing in construction loans, GO Mortgage is a full-service mortgage lender headquartered in Brookfield, Wisconsin, boasting some of the lowest down payment requirements for this type of loan. GO Mortgage issues loans within the framework of government-backed programs including Fannie Mae conventional, FHA, VA and USDA loans, so credit score and down payment minimums (if any) and the maximum loan amounts are determined by program. Notably, the minimum credit score for GO’s single-close construction loan is 640, and you don’t have to make interest payments during the build if you’re using an FHA, VA or USDA loan.
GO Mortgage also has a dedicated construction team that provides you with regular updates and oversees the construction phase, from draw inspections to any state-required surveys. With this process, it typically takes about one year to complete construction and move in.
There is at least one downside to this lender, however, and that’s availability: GO Mortgage only operates in 35 states and Washington D.C.
LowRates.com, operated by Sun West Mortgage Company, offers a variety of mortgages, including construction and renovation loans, in 48 states (not Georgia and Massachusetts) and Puerto Rico. Specifically, the lender offers FHA 203(k) loans as a refinance or for a purchase: You can borrow against the equity in your home for home improvements or you can get a single mortgage to finance both the purchase of a home and the cost of renovating it.
To be eligible for a 203(k) loan, you must prove that the funds will be for construction or renovations, have a credit score of 580 or higher and provide your lender a list of proposed improvements.
One noteworthy perk: The LowRates.com team has a 24-hour loan center that can answer questions related to renovation and construction loans. However, anyone interested in exploring those options will need to contact the lender to learn more, since not much information is readily available online.
Flagstar Bank is a bank and lender and one of the largest financial institutions in the U.S. Flagstar offers a variety of mortgage options, including renovation loans and new-home construction loans, through its branches or online.
One option, a construction draw loan, can be used to build primary residences up to $3 million and second homes up to $2.5 million. The bank also offers one-closing (construction-to-permanent) or two-closing (construction-only) loans, with the one-closing combining the construction financing into the same loan as the permanent mortgage and the two-closing entailing two separate loans.
As with most construction loan lenders, however, you’ll likely have a higher interest rate with Flagstar for the construction loan itself (in other words, before it converts to a permanent loan). According to the bank, during construction, the interest is 0.75 percent higher than the permanent rate.
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. In general, these types of loans can be more difficult to secure, and often have higher interest rates.
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, and borrowers have more options when it comes to accessing funds.
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.
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.