Best Construction Loan Lenders Of 2025

When shopping for a construction loan lender, consider the following tips:

A construction loan is short-term financing, typically with a year-long term—sometimes less—and provides funding for new residential, rehabilitation or remodeling projects. Construction loans only cover the building process expenses, which typically include:

• The cost of the land parcel
• Contractor, labor and materials expenses
• Permits and fees
• Contingency and interest reserves

To be eligible for a construction loan, mortgage lenders often require borrowers to hire a qualified, licensed contractor with a good track record building new construction homes rather than home buyers acting as their own contractors.

One notable downside of construction loans is that they usually have higher interest rates than traditional mortgages. Construction loan interest rates are higher because lenders see them as high-risk, as no home exists yet to serve as collateral should the borrower default. Higher rates also serve as an incentive for builders to complete the project in a timely fashion.

In addition to higher interest rates, lenders mitigate risk during the construction loan application process by requiring borrowers meet the following conditions:

• Have at least the minimum credit score and down payment
• Demonstrate strong financial health
• Provide detailed project and budgeting plans
• Show proof of builder expertise and experience
• Have a construction timeline

Once you receive approval for a construction loan, the lender usually remains involved with the project and issues funds over the life of the construction loan. For instance, rather than giving you the loan in one lump sum, construction loan lenders typically release portions of the loan on a “draw” schedule as the construction project progresses and hits specific milestones.

While your home is being built, you’re only responsible for paying interest on the loan portion you use. However, at the end of the project, you’ll need to repay the construction loan in full, refinance it into a traditional mortgage or take out an “end loan” to pay it off.

Much like standard home loans, construction loans come in a range of products designed to fit borrowers’ needs. Some of the best construction loan lenders may also offer proprietary new construction loan products. Here are the main types of construction loans available.

Construction-Only Loan

This short-term loan covers the building project. Once the project is complete, the borrower either repays the loan in full or refinances into a new mortgage to pay off the remainder of the construction loan.

Construction-to-Permanent Loan

Also called a C2P loan, this loan funds the construction project and then converts automatically to a traditional fixed-rate or adjustable-rate mortgage once the project is complete.

Owner-Builder Loan

This loan is for borrowers who intend to act as their own contractors. However, this loan requires borrowers to jump through some hoops and provide extensive proof that they are licensed and qualified as contractors for their construction projects.

FHA Renovation Loan

Known as an FHA 203(k) loan, this product is for home buyers or owners who need access to affordable financing for home renovations. The 203(k) loan insures purchase or refinance loans and the rehabilitation costs via a single mortgage. It requires you to use an FHA-approved 203(k) consultant.

FHA Construction-to-Permanent Loan

In addition to the 203(k) loan, the FHA offers a construction-to-permanent loan option. This FHA-insured loan combines a short-term construction loan with a traditional FHA loan. The single-close loan covers the land purchase, construction labor and material costs, lender fees and permits. It then converts to a permanent mortgage once the construction phase ends.

USDA Construction Loan

USDA construction loans allow for up to 100% financing for newly constructed homes. They require the property to be a primary residence in a rural area with a population of 35,000 or fewer. In addition, the lender and contractor must be USDA-approved.

VA Construction Loan

The VA lenders can offer two types of VA-insured construction loans: a one-time close loan and a two-time close loan.

The one-time close, or single close, loan is a construction-to-permanent loan that covers land purchase costs, home building costs and final payment terms. The two-time close loan consists of a construction loan and permanent loan with two separate closing dates. Both loans require a VA funding fee.

Related: VA Construction Loan Guide: Everything You Need To Know

Though applying for a construction loan may seem daunting, the application and approval process is not too different from a resale home purchase. Here are the steps to take to ensure a smooth experience:

• Assess your budget. Before taking the leap into applying for a construction loan, pencil out your estimated homeownership expenses to make sure you can afford the monthly costs, such as your mortgage payment, insurance, property taxes, utilities, regular maintenance and homeowners association (HOA) fees.
• Save for a down payment. Lenders typically require a minimum 20% to 25% down payment on a construction-to-permanent loan.
• Understand (and improve) your credit score. Keeping your credit score accurate and as strong as possible will improve your chances of getting the best interest rate and loan terms.
• Shop multiple lenders to get the best deal. Comparing lenders will provide additional leverage to lower your loan costs, with many experts suggesting that applying to three lenders is the sweet spot for negotiating the best deal without severely impacting your credit score.
• Consider your loan options. Determine whether a one-time close or construction-to-permanent loan is best for your situation. Find out if you qualify for an FHA or VA construction loan or any lender-specific proprietary construction loans.
• Get your financial paperwork in order. Your lender will want to see your financial picture, including your debts, assets and income.
• Execute a signed contract with your builder or developer. The contract will include details affecting your loan, such as estimated construction and land costs, and the project timeline.
• Attain builder credentials. You must provide your lender documentation that the builder or developer is licensed, insured and financially stable.
• Provide information for appraisal. Lenders require an appraisal to determine the value of your project, so you will need to provide details such as property address and contact information, construction and budget plans and land survey results.
• Apply online or speak with a lender. Once you speak with a loan advisor and submit your initial information form or prequalification application, a loan officer will typically contact you to continue the conversation and help with the rest of the application process.

Construction Loan Requirements

• Minimum down payment of 20% to 25%
• Licensed and insured builder or contractor
• Signed contract with a builder
• Detailed construction plan, business plan, home specifications and project timeline
• Project appraisal
• Solid credit score (often at least 720)
• Excellent cash reserves
• Low debt-to-income (DTI) ratio

Though interest rates for construction loans are higher than traditional mortgage rates, you can take these steps to improve your chances of receiving a lower rate:

• Shop multiple construction loan lenders
• Boost your credit score
• Save for a larger down payment
• Ask lenders about rate-lock and float-down options
• Refinance your construction loan to a lower rate

In addition to strategizing how to get the lowest interest rate, consider which loan will save you the most. For example, a construction-to-permanent loan only requires one closing, potentially saving you money on closing costs.

Whether you choose a construction loan or traditional mortgage will depend on your financial circumstances and goals. If you want to build a newly constructed home, rehabilitate a fixer-upper or execute a major renovation on your existing home, then a construction loan is likely the best option.

On the other hand, if you’re leaning toward purchasing a new construction home, a traditional mortgage may be your best fit. Here’s a breakdown of the two options.

CONSTRUCTION LOAN	TRADITIONAL MORTGAGE
For borrowers looking to build a new home, rehabilitate an existing home or complete a major renovation	For borrowers looking to purchase a new construction or existing home
Lenders usually expect a higher credit score and additional requirements such as detailed building plans, construction budget, future home value and land appraisal	Requires you to provide standard financial documentation such as proof of income, asset statements and total debts for loan approval
Interest rates are typically higher due to the riskier nature of these loans	The home serves as collateral so interest rates tend to be lower
Most construction loans require a minimum down payment of 20% to 25%	Wide variety of no or low down payment options
Short-term loans with a duration between 12 and 18 months	Long-term loans typically range between 10 and 30 years

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Though a construction loan is the best choice for many seeking to build from the ground up or make major renovations to an existing home, it’s always worthwhile to consider alternative financing options to assess if there is a better fit, depending on the size and scope of your project and your financial situation.

Construction Loan vs. Home Equity Line of Credit

Because construction loans are based on the future value of a newly-built home or completed renovation, they typically offer more funding than a home equity line of credit (HELOC) and will appeal to those seeking short-term, fixed-rate financing. However, the fixed amount offers little latitude for unanticipated cost increases.

In contrast, a HELOC is a flexible, revolving line of credit that allows borrowers to draw on the home equity in their current residence. Due to the longer repayment period, HELOCs typically have lower monthly payments than construction loans and lower closing costs.

However, HELOC rates are variable, so borrowers must consider their project timeline amid interest rate fluctuations and understand the foreclosure risks if they default.

Construction Loan vs. Home Equity Loan

A home equity loan is another alternative to a construction loan. However, unlike a HELOC, it allows borrowers to access their home equity in a lump sum at a fixed rate. This option may suit those with significant equity who want all their funds up front and at a lower rate than a construction loan typically offers.

However, monthly payments could be higher since this loan includes principal and interest payments, unlike interest-only construction loans. Home equity loans might not provide enough financing to fund large-scale projects.

We graded construction loan lenders based on features that have a meaningful impact on the cost of a mortgage and a borrower’s experience, including loan options, borrower requirements, accessibility, closing time and customer service.

We award bonus points if a lender offers certain products or features, including a specialty rate discount or government-backed construction loans.

Our scoring method is broken down as follows:

• Loan options. 25%
• Customer service experience. 20%
• Credit score. 15%
• Time to close. 15%
• Accessibility. 15%
• Down payment. 10%
• Bonus points. Up to 25 points

We chose to focus on these core elements to bring forward construction loan lenders that offer the most competitive rates while also providing a satisfactory customer experience accessible to borrowers of all financial backgrounds. We believe this scoring system best reflects consumers’ top priorities when comparison shopping for mortgage lenders.

To learn more about our rating and review methodology and editorial process, check out our guide on How Forbes Advisor Reviews Mortgage Lenders.