How Construction Loan Down Payments Work—And Why They're Different
Construction loans require a down payment before you break ground, not when you move in
A construction loan down payment is money you put down at the start of the building process, typically 20 to 25 percent of the total project cost. Unlike a mortgage down payment on an existing home, this money goes toward the construction itself—paying the builder, subcontractors, and material suppliers as work progresses. The lender disburses the rest of the loan in stages, called draws, as the project reaches certain milestones.
Construction loans work differently from traditional mortgages because the lender is funding a project that doesn't yet exist. Your down payment shows the lender you have skin in the game and reduces their risk. Without it, most construction lenders won't fund the project at all.
Key Takeaways
- Construction loan down payments are typically 20 to 25 percent of the total project cost and must be paid upfront before construction begins.
- The lender releases the remaining funds in draws tied to construction milestones, not all at once like a traditional mortgage.
- Your down payment comes from your own savings, a home equity line of credit, or sometimes a gift, but the lender will verify the source.
- Interest on construction loans is usually higher than mortgage rates and accrues only on the money actually drawn, not the full loan amount.
- Once construction is complete, the construction loan typically converts to a permanent mortgage, and you'll need to may have access to for that separately.
Where the down payment money comes from
Most lenders require your down payment to come from your own liquid savings—money in a bank account that you can document. You'll need to show bank statements, usually for the last two to three months, proving the funds are yours and have been there long enough that the lender is confident they're not borrowed money.
Some lenders allow a portion of the down payment to come from a gift, typically from a family member. If you use a gift, the person giving it must sign a gift letter stating the money is a gift, not a loan you'll repay. The lender will verify this with the gift-giver.
A smaller number of lenders will let you use a home equity line of credit (HELOC) on an existing property as part of your down payment, but this is less common and depends on the lender's rules. Regardless of the source, the lender will ask for documentation proving where the money came from and that it's legitimately yours.
How the draw process works during construction
After you pay your down payment, the lender doesn't hand over the rest of the money all at once. Instead, the funds are released in stages called draws, usually tied to construction milestones. Common milestones include foundation completion, framing, roof installation, electrical and plumbing rough-in, drywall, and final inspection.
The builder or general contractor typically requests a draw when a phase is complete. The lender sends an inspector to verify the work matches what was promised in the construction contract and budget. Once approved, the lender releases that portion of the loan directly to the builder or to you, depending on the loan agreement. This process protects both you and the lender by ensuring money is spent on actual construction work.
The number of draws varies by project size and complexity. A simple home might have four to six draws; a larger or custom build might have eight to twelve. Each draw request can take one to two weeks to process, so delays in construction can delay funding.
Interest rates and how you pay during construction
Construction loans typically carry higher interest rates than traditional mortgages—usually 1 to 2 percentage points higher. This is because the lender is taking on more risk: the project could stall, costs could overrun, or the final home might be worth less than expected.
During the construction phase, you usually pay interest only on the money that has been drawn, not on the full loan amount. So if you have a $400,000 construction loan and only $100,000 has been drawn so far, you pay interest only on that $100,000. Interest-only payments are typically lower than principal-and-interest payments, which is why construction loans are sometimes easier to carry month-to-month while building.
However, some lenders require you to pay both interest and principal during construction, or they capitalize the interest—meaning unpaid interest gets added to your loan balance. Always ask your lender upfront how interest accrues and what your monthly payment will be during construction.
The transition from construction loan to permanent mortgage
When construction is complete and the final inspection passes, the construction loan doesn't automatically become a mortgage. Instead, you'll need to refinance into a permanent loan (a traditional mortgage). Some lenders offer a construction-to-permanent loan, which rolls the construction loan into a mortgage at a set rate once building is done. This can save you from refinancing costs, but the rate is locked in when you sign the original construction loan, not when construction ends.
To may have access to for the permanent mortgage, you'll need to meet the lender's underwriting standards again. Your income, credit, and debt-to-income ratio must still may have access to, and the lender will order a final appraisal to confirm the completed home is worth what you borrowed. If your financial situation has changed significantly during construction, you could face problems may have access to for the permanent loan.
The permanent mortgage will be based on the home's appraised value, not the total amount you borrowed for construction. If the home appraises for less than your construction loan balance, you may owe the difference out of pocket, or you may need to refinance for a lower amount and cover the gap yourself.
Down payment requirements vary by lender and loan type
Most conventional construction lenders require 20 to 25 percent down. Some require as much as 30 percent, especially for custom builds or if you're the owner-builder (doing much of the work yourself). A few lenders will go as low as 15 percent down, but this is less common and usually comes with a higher interest rate or additional fees.
FHA construction loans exist but are less common than conventional construction financing. FHA allows down payments as low as 3.5 percent, but the process is more complex and the lender must be FHA-approved for construction lending. VA construction loans are available to may be able to access veterans and typically require no down payment, though you'll still need to meet income and credit requirements.
Portfolio lenders—banks that hold loans in-house rather than selling them—sometimes have more flexible down payment requirements, but they're harder to find and may charge higher rates. Always ask multiple lenders what their minimum down payment is, because it varies significantly.
What happens if construction costs overrun
If the project costs more than the original budget, you have limited options. The construction loan is based on the original estimate, and the lender won't automatically increase it. You can ask the lender for a loan modification to increase the amount, but they may refuse or charge a fee. More commonly, you'll need to cover overruns out of pocket or negotiate with the builder to reduce scope.
This is why having some savings beyond your down payment is important. Many builders and lenders recommend keeping 5 to 10 percent of the total project cost in reserve for unexpected expenses—foundation issues, material price increases, or design changes. If you've already committed all your savings to the down payment, cost overruns can derail the project.
Before you sign a construction contract, get a detailed estimate from the builder and ask what contingencies are built in. A reputable builder will have already padded the estimate slightly for unknowns. If the estimate seems too low, it probably is.
Frequently Asked Questions
Can I use a gift for my entire down payment?
Most lenders allow gifts for part of the down payment but require you to contribute some of your own funds—typically at least 5 to 10 percent from your own savings. The lender wants to see that you have personal financial commitment to the project. The gift-giver must provide a signed gift letter, and the lender may contact them to verify the gift is real.
What if I don't have 20 percent saved for a down payment?
Some lenders will accept 15 percent down, and VA loans require none for may be able to access veterans. FHA construction loans allow 3.5 percent down but involve more paperwork and stricter requirements. Expect to pay a higher interest rate if you put down less than 20 percent. You might also explore whether a construction-to-permanent loan with a lower down payment requirement exists in your area.
Do I have to pay my down payment all at once?
Yes, the down payment is due upfront, before construction begins. Some lenders may allow you to pay it in two installments—part at loan approval and part at closing—but this is uncommon. Confirm the payment schedule with your lender before you commit.
What if the home appraises for less than I borrowed?
When the construction loan converts to a permanent mortgage, the appraisal determines the home's value. If it's lower than your loan balance, you'll owe the difference unless you refinance for a lower amount and cover the gap from savings. This is rare but can happen if construction quality issues emerge or the market shifts during building.
Can I get a construction loan without a down payment?
Only VA loans (for may be able to access veterans) typically allow zero down on construction. Conventional lenders require at least 15 to 25 percent down. If you don't have savings for a down payment, you may need to delay building until you can save, or explore whether a VA loan is an option for you.