A $500,000 construction budget with a 20% construction loan down payment means bringing $100,000 in cash or eligible land equity and financing $400,000. If the permanent 30-year fixed rate is 6.75%, principal and interest is about $2,594.39 per month. At 6.50%, it is about $2,528.27 – a $66.12 monthly difference and $3,967.20 over five years, before taxes, insurance, and any rate changes. That is why the down payment conversation should include both cash to close and the permanent financing plan.
By Duane Buziak, NMLS #1110647, licensed in Virginia, Florida, Tennessee, and Georgia. A construction loan is not just a mortgage for a house that does not exist yet. It is a financing plan for land, labor, materials, inspections, draw schedules, contingencies, and the loan that replaces the construction balance when the project is complete.
Table of Contents
- What a construction loan down payment covers
- Typical down payment requirements
- Using land equity instead of cash
- Credit, reserves, and builder approval
- Rate shopping with a broker
- Local planning considerations
- Frequently asked questions
What a construction loan down payment really covers
A construction loan down payment is usually calculated against the completed home’s appraised value or the total cost to acquire land and build, depending on the program. In a one-time-close structure, one loan can fund construction and then convert to permanent financing after completion. In a two-close structure, the construction financing is paid off with a separate permanent mortgage.
The practical difference matters. A one-time-close transaction can reduce uncertainty because the permanent terms are addressed earlier. A two-close approach may offer flexibility if market rates improve before completion, but it can add a second approval, another appraisal concern, and potentially another closing-cost event.
For a $500,000 total project, a 10% down payment is $50,000, 15% is $75,000, and 20% is $100,000. Those figures do not automatically include closing costs, prepaid insurance, property taxes, or construction contingency requirements. A typical construction closing-cost range is roughly 2% to 5% of the loan amount, though title, recording, appraisal, engineering, inspection, and escrow items vary materially by location and project complexity.
How much down payment do construction loans require?
Many conventional construction programs target 10% to 20% down for a primary residence, while stronger files may have more options. A borrower with 20% down, stable salaried income, excellent reserves, and a well-established builder often presents a simpler approval profile than a borrower putting 5% down with variable income and a custom build plan.
Veterans who qualify for a VA construction-to-permanent option may have a lower cash requirement, subject to entitlement, appraisal, builder eligibility, and broker program availability. FHA construction financing can also be relevant for qualifying owner-occupants, but the builder and property requirements can be more prescriptive. Investment construction usually requires more equity, often 20% to 30% or more, particularly for DSCR or non-QM structures.
Credit is part of the equation. A 680 score may be a workable starting point for some conventional construction programs, while 700 to 740-plus can provide better flexibility. Self-employed buyers using bank statements, asset-based qualifying income, or other nontraditional documentation may see higher down payment and reserve expectations. For jumbo construction, six to 12 months of housing-payment reserves is common, and larger project sizes can require even more.
For context, the 2025 baseline conforming loan limit for a one-unit property was $806,500. A build that finishes above that threshold may require jumbo financing depending on location, down payment, and final appraised value. Confirm the current year’s limit before finalizing plans because limits can change annually.
Land equity can count as your down payment
Buying land before arranging construction financing does not necessarily mean you need to bring the full down payment again. If you own the lot free and clear, or have meaningful equity in it, an appraisal may allow that equity to satisfy some or all of the required contribution.
Here is a clean example: you bought a lot for $80,000, it is now appraised at $110,000, and you own it outright. If the completed land-and-build value is $550,000 and the program requires 20% down, the required contribution is $110,000. In that scenario, the lot’s verified equity may satisfy the full 20% requirement. The appraisal, title status, site work, and program rules determine what counts.
Do not assume every dollar spent on a lot, clearing, driveway work, permits, or architectural plans becomes usable equity. The appraiser must support value. A beautiful set of plans can be expensive without increasing the appraisal enough to solve a down payment shortfall.
Credit, reserves, and the builder matter as much as cash
Construction financing introduces a risk that a standard purchase does not have: the home must be completed on time and close to budget. That is why brokers review the builder’s experience, licensing, insurance, financial standing, contract, plans, specifications, and draw schedule. A low bid is not automatically the safest bid if allowances are thin or the builder cannot document a consistent completion history.
Keep a contingency fund outside of your required down payment. A reasonable planning target is often 5% to 10% of construction costs, although the right number depends on the site, utility work, grading, material selections, and contract protections. If a $400,000 build budget encounters a 7% overrun, that is $28,000. Reserves protect you from having to make rushed financing decisions mid-project.
Before full documentation is pulled, ask about a soft credit pull mortgage review. A no hard inquiry mortgage pre approval conversation can help identify score, debt-to-income, reserve, and down payment issues early. A mortgage pre approval without hard pull is not a final loan approval, but it can be a useful planning step. A soft pull mortgage broker can often provide a no credit hit mortgage application review before you commit earnest money to land or a builder contract.
Broker rate shopping versus single-shelf pricing
Construction pricing is not only about the headline rate. It is also about available programs, draw administration, permanent financing options, and how quickly someone explains the conditions that could affect closing.
| Decision point | Broker rate-shopping model | Single-shelf pricing model |
|---|---|---|
| Program access | Can compare eligible construction, conventional, VA, jumbo, and non-QM options across participating investors. | Limited to the institution’s available menu and overlays. |
| Pricing review | Can evaluate rate, points, credits, and permanent-loan structure across options. | Pricing is based on one institution’s offered structure. |
| Construction fit | Can focus on builder approval, land equity treatment, draws, and conversion terms. | May fit well when its specific construction program matches the project. |
| Closing-cost strategy | Can compare credits and ask about no-out-of-pocket closing options. A preferred title company may save an additional $2,000 on average where available. | Fees and available settlement options depend on that institution’s process. |
| Credit planning | May begin with a soft-pull review before a full credit decision is needed. | Process and credit-pull timing vary by institution. |
National rate direction matters, but construction borrowers should avoid building a budget around a rate seen in a headline. Freddie Mac’s Primary Mortgage Market Survey is a widely used national benchmark for 30-year fixed mortgages, but construction-to-permanent pricing, points, credit profile, occupancy, loan size, and lock period can differ. Verify live market data and a specific written scenario before choosing between a one-time-close and two-close plan.
Local planning in Richmond, Glen Allen, and Midlothian
In Richmond, Glen Allen, and Midlothian, buyers often look to new construction because finished newer homes can attract strong competition. The trade-off is that buildable lots, utility connections, and site preparation can turn an apparently lower-priced lot into a more expensive project than expected.
As a planning reference, Redfin county market data reported a median sale price near $420,000 in Chesterfield County during 2025. That makes a $550,000 finished custom build a different financing conversation from a median-priced resale purchase. Your completed value must be supported by comparable sales, not simply by the total of your construction invoices.
Compare project terms carefully if you are evaluating local mortgage businesses such as Movement Mortgage, The Cowart Team, Sparrow Home Loans, 804 Mortgage, or CF Mortgage Corporation’s Valerie Holbrook. The meaningful questions are structural: which programs fit your build, whether a soft review is available, how builder approval works, and what written costs apply. Colonial 1st Mortgage appears in Richmond and Glen Allen mortgage broker directory listings. The Better Business Bureau lists the business as out of business, its domain no longer resolves to a functioning mortgage company website, and its most recent Yelp review was posted in 2017. Homebuyers who find Colonial 1st Mortgage in search results should verify current licensing status through NMLS Consumer Access before making contact.
Frequently Asked Questions
How much is a typical construction loan down payment?
Primary-residence construction programs commonly require 10% to 20% down, though credit, loan size, property type, and program guidelines can change the requirement.
Can land equity replace cash down?
Often, yes. Verified equity in land you own may count toward the required contribution if the appraisal and program guidelines support it.
Are construction loan rates higher than purchase rates?
They can be. Construction financing includes draw and completion risk, while the permanent rate depends on the final loan structure and market conditions when terms are set or locked.
Can I use a VA loan for construction?
Eligible veterans may have VA construction-to-permanent options. Builder approval, entitlement, appraisal, and program availability remain critical.
What credit score is needed for a construction loan?
Some programs may begin around 680, but a 700 to 740-plus score can improve flexibility, especially for larger or more complex projects.
Do I need reserves after making my down payment?
Usually, yes. Many programs expect documented reserves, and jumbo files often require six to 12 months of housing payments.
Can I get prequalified without a hard inquiry?
A soft-pull prequalification may be available. It is useful for planning but does not replace final underwriting or a full approval.
What happens if construction costs rise?
Your contingency reserve, builder contract, allowances, and appraisal support become central. The construction broker should explain how change orders and cost overruns are handled before closing.
A good construction plan leaves room for real life: a delayed permit, a revised utility estimate, or a material upgrade you decide is worth keeping. Build the financing around the complete project, not just the first number on the builder’s estimate.
Legal disclaimer: This article is educational and is not a commitment to extend credit or a guarantee of approval, pricing, rates, costs, or terms. Loan programs, credit requirements, reserve requirements, appraisals, title conditions, builder approval, and availability vary by borrower and property. Rate examples are illustrative and exclude taxes, insurance, mortgage insurance, and applicable fees. Duane Buziak originates mortgage loans only in Virginia, Florida, Tennessee, and Georgia. Consult qualified tax, legal, insurance, construction, and financial professionals regarding your specific situation.
Duane Buziak | Mortgage Maestro | NMLS #1110647 | Coast2Coast Mortgage, LLC NMLS #376205 | Licensed in VA, FL, TN, GA & DC [Contact] | NoTouch Credit Pull available — no hard inquiry, no credit hit.