How much down payment do I need for a construction loan?


A grPlanning monthly House construction loan Finance concepteat question ,and I get this nearly every day from clients. The down payment needed for the construction loan depends on the type of end loan financing that will be placed – conforming or non-conforming.  We always start with the end in mind, the loan that will be placed when construction is completed, and structure the construction loan with that in mind.

Let’s talk about the differences between conforming conventional loans and non-conforming, or jumbo, products. The conforming loan limit in our area is $424,100, so ifyou keep your mortgage balance at or under this number, the conforming rules apply. If your mortgage balance exceeds $424,101, then the non-conforming rules apply.

Conforming conventional loans can be done with as little as 5% down. We translate that to the construction loan, where the client can invest 5%. In this instance, since our construction lending banks like to keep their exposure to a max of 80%, we would hold back 15% from the builder during the construction process to keep the bank happy. This also reduces carrying costs for the consumer, as interest-only payments are charged only on the funds that have been drawn from the construction line.

Non-conforming, or jumbo, mortgage loans need a minimum of 20% down; but we can, in some cases, use a conforming first mortgage along with a second mortgage to decrease the client’s investment to 10%. We look at each scenario separately to determine the best outcome for the client.

If a lot is purchased first, the client already has equity in the transaction through the down payment given at the time of the lot purchase. That down payment counts in the total cash needed for the project, and only the balance is due at the time the construction loan closes.

Don’t get bogged down with all the details. My team deals with these loans daily and can help you structure the loan that works best for you. Just give us a call and we will show you how construction financing is as easy as 1-2-3.

– Randy Cullen, NMLS# 326128

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