How Much Should You Put Down When Building Your Home?

by Roger Snyder 10/11/2021

Photo by Karolina Grabowska from Pexels

Most people who decide to build a new house plan on financing the construction via one of the multiple financing options available. However, the size of the down payment depends on what type of loan is taken out for the project. The following is a breakdown of what different loan programs commonly require.

Conventional Construction Loan: 20 to 25%

A conventional construction loan that has no government backing will typically require a down payment of 20 to 25%. 

This range sits just above the 20% down payment that most standard mortgages require to avoid private mortgage insurance (PMI). The primary reason construction loans sometimes require a slightly higher down payment is because the lender’s risk is a little higher. Without a fully built home to use as collateral, there’s the possibility for a higher chance that the lender has difficulty recouping their investment if you default.

While you could theoretically transition your construction loan to a mortgage that has less than 20% down after construction is completed, most homebuyers who build maintain the 20% down payment on their mortgage. They can avoid PMI this way, and they’ve already saved up the money to afford the construction loan.

For example, a 20 to 25% down payment on a $200,000 house would be between $40,000 and $50,000.

FHA One-Time Close Construction Loan: 3.5%

The Federal Housing Authority (FHA) offers government-backed loan options that make housing accessible to lower-income homebuyers and homebuyers with lower credit scores. Many homebuyers who don’t qualify for a conventional loan can get an FHA loan, and sometimes it’s helpful to use the agency’s loan products even if you have other options available.

For new home construction, the FHA offers a one-time Close Construction Loan. The required down payment is only 3.5 percent. The loan must be used to build what will become your primary residence, and you will have to pay PMI. Few programs make low down payment construction loans so widely available, though.

A 3.5% down payment on a $200,000 house would be $7,000.

USDA New Construction Loan: 0%

The U.S. Department of Agriculture (USDA) makes government-backed loans available to qualified homebuyers who are building houses in rural areas. What areas qualify as rural is determined by the government, and the boundaries can be quite specific. A contractor can help you check with the agency to see whether a specific location qualifies.

For qualifying homes, USDA new construction loans require nothing down. They are highly advantageous if you’re building in a qualifying area for this reason.

VA: Need Construction Loan

Veterans Affairs (VA) home mortgages are available to qualifying veterans who build a new house, but the VA doesn’t offer new construction loans. Instead, a conventional construction loan is first needed. After construction is complete, the loan can be transferred to a traditional VA loan.

Explore Your Financing Options

If you’re saving up to build a new house, you might not need as much as you think. Explore what your financing options are and see how quickly you could break ground.

About the Author

Roger Snyder

As a Miami native, Roger understands the local market and neighborhoods like few other agents can. Roger takes the time to listen to his clients, and they appreciate his friendly, honest, and practical approach. His background enables him to navigate the social and technical aspects of the marketplace. Roger offers an informed and efficient service and strives to make the process as comfortable and stress-free as possible for his clients. 

After graduating from South Miami High School, Roger enlisted in the United States Air Force and attended Southern Illinois University where he earned a degree in industrial technology. Roger went on to enjoy a career with the Department of Defense, and has held executive positions in sales, engineering, marketing, and business development before transitioning into real estate. His interdisciplinary background enables him to better understand the dynamics of today’s real estate environment and clients appreciate his friendly, candid and hands-on business style.

During his free time, Roger is a dedicated father, volunteer, coach handyman and backyard mechanic. He is committed to giving back to the community serving as a Foundation Board Member of Community Health of South Florida, and is the Frist Vice Commander of the American Legion Post 133 and is the Post Commander of Post 243 of the Jewish War Veterans.