Home construction financing options include conventional construction loans (20-25% down, 7-9% rates), FHA one-time-close loans (3.5% down), VA construction loans (0% down for veterans), USDA construction loans (0% down in rural areas), and SBA 504 loans (10% down for owner-occupied commercial buildings). The best option depends on your property type, location, military status, and intended use. Whether you are building a single-family home, a custom estate, or an owner-occupied business facility like a dental office or veterinary clinic, understanding each program's requirements will help you choose the right path and avoid costly mistakes.
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Home construction financing is more complex than a standard mortgage because the property does not exist yet. Lenders take on additional risk, which means stricter qualification standards, higher interest rates during the build phase, and more documentation. However, government-backed programs from the FHA, VA, and USDA have made new construction accessible to a wider range of borrowers. For business owners building commercial facilities, the SBA 504 program provides one of the most affordable construction financing options available, with just 10% down and below-market fixed rates.
Contact our construction lending specialists today to discuss which financing program fits your project.
What Are the Main Types of Home Construction Financing?
Home construction financing falls into five primary categories, each designed for different borrower profiles and property types. Understanding the differences between these programs is the first step toward securing the right loan for your project.
Conventional construction loans are offered by banks and credit unions without government backing. They typically require 20-25% down, credit scores of 680 or higher, and six months or more of cash reserves. These loans come in two varieties: construction-only loans that must be refinanced into a permanent mortgage after the build, and construction-to-permanent loans that automatically convert to a standard mortgage once the home is complete.
FHA construction loans use the FHA One-Time-Close program to combine the construction and permanent phases into a single closing. Borrowers can qualify with just 3.5% down and credit scores as low as 580, making this one of the most accessible options for first-time home builders. You can learn more in our detailed FHA construction loan guide.
VA construction loans allow eligible veterans and active-duty service members to build a home with zero down payment. The VA One-Time-Close program eliminates private mortgage insurance and offers competitive interest rates, though finding VA-registered builders can be challenging in some markets.
USDA construction loans provide zero-down financing for homes built in eligible rural and suburban areas. Income limits apply, and the property must serve as the borrower's primary residence. Our USDA construction loan requirements guide covers eligibility in detail.
SBA 504 construction loans are specifically designed for business owners building owner-occupied commercial properties. With just 10% down and fixed rates often 1-2% below conventional commercial loans, the SBA 504 program is ideal for professionals building offices, clinics, restaurants, and manufacturing facilities.
How Do Conventional Construction Loans Work?
Conventional construction loans are the most common form of home construction financing, offered by nearly every bank and credit union in the country. These loans fund the building process through a series of scheduled disbursements called "draws" that are released as the builder completes specific milestones, such as pouring the foundation, framing the structure, and finishing the interior.
During the construction phase, which typically lasts 6-12 months, borrowers make interest-only payments on the amount that has been drawn. This keeps monthly costs lower while the home is being built. Once construction is complete, the loan must either be paid off or converted to a permanent mortgage.
Borrowers have two options when it comes to structuring conventional construction financing. A construction-only loan covers just the building phase and requires the borrower to separately apply for and close on a permanent mortgage once the home is finished. This means two sets of closing costs, two underwriting reviews, and the risk of interest rate changes between closings. A construction-to-permanent loan wraps both phases into a single transaction with one closing, one set of fees, and a locked permanent interest rate.
Qualifying for a conventional construction loan requires strong financial credentials. Most lenders want to see a credit score of 680 or higher, a debt-to-income ratio below 43%, and a construction loan down payment of at least 20%. Borrowers also need to present detailed construction plans, a signed builder contract, and a completed appraisal based on the home's projected value. For current rate information, check our guide on construction loan interest rates.
The lender will also vet the builder, requiring proof of licensing, insurance, and a track record of completed projects.
What Are FHA Construction Loan Requirements?
The FHA One-Time-Close construction loan is one of the most borrower-friendly options for home construction financing. Backed by the Federal Housing Administration, this program allows buyers to finance the land purchase, construction costs, and permanent mortgage all within a single loan closing. This eliminates the need for multiple applications, multiple sets of closing costs, and the uncertainty of qualifying for a second loan after the build.
To qualify for an FHA construction loan, borrowers need a minimum credit score of 580 for the 3.5% down payment option, or a score of 500-579 with 10% down. The total debt-to-income ratio generally cannot exceed 43%, though some lenders allow up to 50% with compensating factors like significant cash reserves or a history of managing similar payment amounts.
One of the most important FHA construction loan requirements is that the builder must be HUD-approved. This means the contractor has been vetted by the Department of Housing and Urban Development and meets specific standards for licensing, insurance, and financial stability. Finding a HUD-approved builder can be challenging in some areas, so start this search early.
FHA construction loans also require the home to meet HUD's Minimum Property Requirements (MPRs), which cover safety, structural soundness, and livability. The property must serve as the borrower's primary residence. Maximum loan amounts follow FHA county limits, ranging from $524,225 in standard-cost areas to $1,209,750 in high-cost markets for 2026.
The interest rate is locked at closing, protecting borrowers from rate increases during the 6-12 month construction period. Once the build is complete, the loan automatically converts to a standard FHA mortgage with a 30-year fixed term. Borrowers pay the standard FHA mortgage insurance premium (MIP) of 1.75% upfront and 0.55% annually for the life of the loan.
Can Veterans Use VA Loans for New Construction?
Yes, eligible veterans, active-duty service members, and surviving spouses can use VA loans to finance new home construction with zero down payment. The VA One-Time-Close construction loan program combines the construction and permanent financing phases into a single transaction, similar to the FHA version but with even more favorable terms.
The biggest advantage of VA construction financing is zero down payment. While conventional loans demand 20-25% down and FHA loans require 3.5%, VA borrowers can finance 100% of the construction and permanent loan costs. There is also no private mortgage insurance (PMI), which can save hundreds of dollars per month compared to other loan types.
To qualify, veterans must obtain a Certificate of Eligibility (COE) from the VA, which confirms their service history and entitlement amount. Credit score requirements vary by lender, but most VA construction lenders look for a minimum score of 620-640. The debt-to-income ratio should typically be below 41%, though the VA allows lenders to approve higher ratios with residual income verification.
The builder must be VA-registered and meet the VA's standards for licensing and insurance. The home plans must comply with local building codes and VA Minimum Property Requirements. Fewer lenders offer VA construction loans compared to standard VA purchase loans, so borrowers may need to shop around.
VA construction loans include a funding fee ranging from 1.25% to 3.3% of the loan amount depending on service history and whether it is a first-time or subsequent use. Disabled veterans are exempt from the funding fee.
How Does USDA Construction Financing Work?
USDA construction loans provide zero-down home construction financing for borrowers building in eligible rural and suburban areas. The program, officially called the USDA Single-Close Construction Loan, combines the construction and permanent financing into one transaction with no down payment required.
Eligibility is based on two key factors: the property's location and the borrower's income. The home must be built in an area designated as "rural" by the USDA, which includes many suburban communities outside major metros. You can check eligibility on the USDA's online mapping tool. Household income must fall below 115% of the area median income (AMI) for your county, including all adult household members.
Credit requirements for USDA construction loans are moderate, with most lenders looking for scores of 640 or higher. The debt-to-income ratio must stay below 41% in most cases. Like the FHA and VA programs, the USDA requires the builder to be approved and the home to meet specific property standards.
Borrowers pay two forms of mortgage insurance: an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35% paid monthly. Despite these costs, the combination of zero down payment and below-market rates often makes USDA construction loans the most affordable option for qualifying borrowers. Our USDA construction loan requirements guide covers income limits and property eligibility by state.
USDA construction loans have a maximum term of 30 years, and interest rates are competitive with FHA and VA rates. The construction period typically cannot exceed 12 months, though extensions may be granted for weather delays or material shortages.
Explore your construction financing options with our team. We can help you determine which program offers the best terms for your specific situation.
What Is SBA 504 Construction Financing for Business Owners?
For business owners who plan to occupy the building they are constructing, the SBA 504 loan program offers one of the most attractive construction financing packages available. While the programs discussed above focus on residential home construction, the SBA 504 is designed specifically for owner-occupied commercial properties, including medical offices, dental clinics, veterinary hospitals, restaurants, manufacturing facilities, warehouses, and retail buildings.
The SBA 504 program uses a unique three-party structure. A conventional lender provides 50% of the project cost through a first mortgage, a Certified Development Company (CDC) provides up to 40% through an SBA-backed second mortgage, and the business owner contributes just 10% as a down payment. This means a business owner building a $2 million facility only needs $200,000 in equity, compared to $500,000-$700,000 with conventional commercial construction loans.
The SBA portion of the loan carries a fixed interest rate for the full 20 or 25-year term, and these rates are typically 1-2% below what conventional commercial lenders offer. As of early 2026, SBA 504 effective rates are running in the 6.0-6.5% range, while conventional commercial construction loans are often 8-10%. You can estimate your payments using our commercial mortgage calculator.
To qualify for an SBA 504 construction loan, the business must be a for-profit company operating in the United States, have a tangible net worth below $20 million, and have average net income below $6.5 million over the past two years. The owner must occupy at least 51% of the building (60% for new construction), and the project must create or retain jobs in the community.
Clear House Lending specializes in SBA loans for construction projects. Our team has helped hundreds of business owners finance new facilities with the 504 program, from veterinary clinics to manufacturing plants. We also offer construction loans and bridge loans for commercial projects that do not fit the SBA mold.
How Much Does Home Construction Financing Cost?
The total cost of home construction financing goes beyond just the interest rate. Borrowers need to budget for closing costs, interest payments during the construction phase, inspection fees, and various program-specific charges. Understanding the full cost picture helps you compare programs accurately and avoid financial surprises during the build.
Closing costs for construction loans typically run 2-5% of the loan amount, similar to standard purchase mortgages. However, construction-only loans that require a separate permanent mortgage closing will incur two sets of these fees, potentially adding $5,000-$15,000 to the total cost of the project. One-time-close programs from FHA, VA, USDA, and some conventional lenders eliminate this duplication.
Interest during the construction phase is another significant cost. Since funds are disbursed in stages (draws), you only pay interest on the amount that has been released. On a $400,000 construction loan at 8%, if the average outstanding balance during a 9-month build is $200,000, the total interest cost during construction would be approximately $12,000. This is on top of whatever interest payments begin once the permanent mortgage kicks in.
Government-backed programs add their own fees. FHA loans include a 1.75% upfront MIP plus 0.55% annual MIP. VA loans charge a funding fee of 1.25-3.3%. USDA loans have a 1% upfront guarantee fee and 0.35% annual fee. SBA 504 loans include CDC processing fees and a guarantee fee of approximately 1.5% of the SBA portion. When comparing programs, calculate the total cost over the first 5-7 years of the loan to determine which option truly costs the least.
Additional costs include plan review fees ($300-$500), progress inspection fees ($100-$150 per draw, with 4-6 draws typical), and contingency reserves. Most lenders require a 5-10% contingency built into the construction budget for unexpected costs like material price increases or site conditions. Use our DSCR calculator to evaluate the financial viability of commercial construction projects.
What Steps Should You Follow to Get Home Construction Financing?
Securing home construction financing requires more preparation and documentation than a standard home purchase. The process typically takes 45-90 days from application to closing, though complex projects or government-backed programs may take longer.
Start by getting pre-qualified with a lender who offers the specific construction loan program you need. Not all lenders offer FHA, VA, or USDA construction loans, so confirming product availability early saves time. During pre-qualification, the lender will review your credit, income, assets, and debt obligations to determine how much you can borrow.
Next, finalize your building plans and select a licensed, insured builder who meets the requirements of your chosen loan program. For FHA loans, the builder must be HUD-approved. For VA loans, the builder must be VA-registered. Get a detailed construction contract that includes a line-item budget, construction timeline, and draw schedule.
With your builder, plans, and contract in place, submit a formal loan application with all required documentation: tax returns (2 years), pay stubs or profit-and-loss statements, bank statements (2-3 months), the signed builder contract, architectural plans, and a project cost breakdown. The lender will order an appraisal based on the plans and specifications, which estimates the home's value once construction is complete.
After underwriting approval, you will attend the loan closing and sign all documents. The lender then releases funds according to the draw schedule as the builder completes each phase. A third-party inspector verifies completion at each milestone before the next draw is released. Once the home passes final inspection, the loan converts to its permanent terms (for one-time-close loans) or you close on a separate permanent mortgage (for construction-only loans).
What Are the Most Common Questions About Home Construction Financing?
Can I use land I already own as part of my down payment?
Yes, most construction loan programs allow you to use equity in land you already own toward the down payment. If you own a lot worth $100,000 and are building a $400,000 home (total project $500,000), that land equity represents 20%, which could satisfy the conventional construction loan down payment entirely. FHA, VA, and USDA programs also accept land equity. The land will be appraised at current market value, and any existing mortgage on the land is typically paid off through the construction loan proceeds.
How long does approval take for a construction loan?
Construction loan approval typically takes 30-60 days from application to closing, though government-backed programs like FHA and USDA can stretch to 90 days. The most common delays come from the appraisal (which requires completed plans), builder approval, and environmental reviews. Having all documentation ready at application, including finalized plans and a signed builder contract, can shave 2-3 weeks off the timeline.
What credit score do I need for home construction financing?
Credit score requirements vary by program. FHA accepts scores as low as 580 (or 500 with 10% down). VA loans typically require 620-640. USDA needs 640 or higher. Conventional loans generally require 680-720. SBA 504 loans have no strict minimum, but most lenders prefer 680 or above. Higher scores unlock better rates across all programs.
Can I act as my own general contractor (owner-builder)?
Some conventional lenders allow owner-builders, but it is rare and typically requires professional construction experience, such as holding a contractor's license. FHA, VA, and USDA construction loans generally do not allow owner-builders because lenders want assurance that the project will be completed on time, on budget, and to code. If you want to serve as your own GC, start your lender search by specifically asking about owner-builder programs.
What if I am building a commercial property I will use for my business?
If you are building a facility for your own business, such as a medical office, restaurant, warehouse, or retail store, the SBA 504 loan program is likely your best option. It requires just 10% down, offers fixed rates well below conventional commercial loans, and allows terms up to 25 years. Clear House Lending specializes in SBA 504 construction financing and can guide you through the entire process from application to certificate of occupancy. Learn more about our SBA loan programs.
Ready to start your construction project? Contact Clear House Lending to speak with a construction financing specialist who can match you with the right program and walk you through every step of the process. Whether you are building a dream home or a new business facility, our team has the expertise to get your project funded.