Is it really possible to build a house without a down payment? Yes! You can get a construction loan for the entire build with a construction-to-permanent loan or single-close construction loan with a zero down payment by meeting four key criteria.
A construction-to-permanent loan works by financing your build and absorbing any debt you may have on your land already and converting to a Permanent Mortgage after construction is complete with only one set of closing fees. A construction-to-permanent loan is available for primary residences and second homes. There may be exceptions but usually the property type must be a single-family, one unit, detached home.
While you might not need to make a down payment upfront, you will be required to make interest-only payments but only on the money that has been incrementally paid out from your lender to your builder during the construction process. While it is necessary to have your land to build on first, your construction-to-permanent loan will pay off the remaining debt on your land loan.
The third key to a zero down construction loan is pre-qualifying and knowing your budget. It’s important to get pre-approved early in the custom home building process to determine your budget. Lenders will use standard debt to income ratios, credit score, and employment requirements. You must qualify to borrow enough money to cover all construction costs and any remaining debt on your land.
The fourth key to this strategy is equity. The equity that you create by building a new home is the difference between the total amount borrowed and the appraised value of the completed project based on comparables in your area. Your lender will determine whether or not you will have equity in your completed new home by ordering an appraisal before construction begins. For example, if your land loan is $125k and construction costs are $425k, the total amount borrowed will be $550k. The theoretical appraisal ordered by the lender of the completed new home based on comparables comes back at $670k. The newly created equity of $120k is what essentially takes place of any necessary 20% down payment, based on the theoretical final property value. If the theoretical finished property value equity is less than 20%, you may have to concede that you must pay some level of down payment.
Once your new home is completed, your construction loan will convert to a permanent mortgage loan. While this strategy might not be possible for everyone and every situation, if you are considering a construction-to-permanent loan be sure to ask your lender what your newly created equity will be based on the theoretical finished property value. It may be possible to reduce your down payment to zero!
About Winstar Builders
Winstar Builders is Delmarva’s Premier Custom Home Builder. Every home is uniquely designed and inspired to bring your truly attainable vision to life. We’re committed to making the process of building your Winstar Builders Custom Home as enjoyable, stress-free, and simple as possible. From design and planning to building and warranty service, your Winstar Builders team will manage everything for you from start to finish. We can’t wait to show you the quality materials with precise attention to detail that go into every Winstar Builders Custom Home.
