When Is the Down Payment Due on a Construction Loan?
Understand the unique timing of construction loan down payments and the factors that determine when yours is due.
Building a home often involves a construction loan. This type of loan is specifically designed to cover the costs of construction, presenting unique considerations for borrowers. Unlike purchasing an existing property, the down payment for a construction loan has specific timing and application requirements that differ significantly.
Understanding Construction Loan Down Payments
A construction loan down payment is an upfront sum a borrower provides to secure funding for a building project. Lenders require this payment. Building a new home carries inherent uncertainties, and a down payment demonstrates the borrower’s financial commitment and reduces the lender’s exposure to potential default. This initial investment signals the borrower’s serious intent and ability to manage the project’s financial aspects.
The typical range for a construction loan down payment is 10% to 25% of the total project cost. For conventional construction loans, borrowers expect to put down 10% to 20%, though some lenders may require up to 25% or 30%. Certain government-backed options, such as FHA construction loans, can have lower minimums, sometimes as low as 3.5%, while VA loans may even offer zero down payment options. This contrasts with a standard home purchase mortgage, where down payments might be lower, and the funds apply directly to the completed home’s purchase price. For construction loans, the down payment applies towards the entire project cost, including land acquisition (if applicable), materials, and labor.
Key Stages for Down Payment Timing
The down payment for a construction loan is most commonly due at the loan closing. At closing, all necessary loan documents are signed, and the terms of the construction loan, including the draw schedule for disbursing funds, are formally established. The down payment funds are typically required as a lump sum at this stage.
These funds are applied toward initial project costs, including land purchase or the very first construction draws. For instance, if the construction loan covers 80% of the project, the 20% down payment fills the remaining gap. The payment helps kickstart the project by providing immediate capital for initial expenses, such as site preparation, permits, or the first phases of construction.
Factors Influencing Down Payment Due Dates
Lender policies play a significant role, as each financial institution may have its own specific criteria for down payment amounts and when they must be collected. Some lenders might require the down payment at the time of loan application, while others specify it for the loan closing. The borrower’s financial profile, including credit score and debt-to-income ratio, can also affect the required percentage.
The structure of the construction loan itself impacts the down payment timing. A “construction-only” loan provides funds solely for the building phase, requiring a separate mortgage once construction is complete. In contrast, a “construction-to-permanent” loan, also known as a single-close loan, combines both the construction financing and the permanent mortgage into one loan. For this type, the down payment is due at the single closing, and the loan automatically converts to a traditional mortgage once the home is finished, eliminating the need for a second closing and additional closing costs.
Existing equity in the land can also serve as part or all of the down payment. If a borrower already owns the lot outright or has substantial equity in it, the appraised value of the land can often be credited towards the down payment requirement. The overall scope and complexity of the construction project might also influence lender requirements, with more extensive or higher-value projects sometimes necessitating a larger down payment to mitigate perceived risk.