Construction Loan: Guidelines to Downpayment

A construction loan can provide you with the money that you need to start building a home. These loans work a little bit differently than traditional mortgages. With most construction loans, you are going to have to put down a sizable down payment. This is not the type of loan for which you can usually get 100 percent financing—because there is a lot of risk involved for the lender, they want to make sure that you are sharing in the risk.

You are usually required to put down at least 20 percent of the established value, and sometimes as much as 30 percent. 

Loan to Value Ratio

The size of your down payment is going to depend on the loan to value ratio of your lender. They are going to use estimates from the builder and the building plans to determine how much your property will be worth. You will then have to pay the appropriate amount of money depending on the loan to value ratio.

There are also government loans that can be used for existing homes that need construction repairs. They are called the 203k loan. These types of loans require only a 3.5 down payment, but include mortgage insurance which can make the loan more expensive.

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