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Construction Loan Rates Explained: The Inside Scoop for 2024

Construction loan

A construction loan is a short-term loan used to finance the building or renovations of a home or other real estate property. It provides funds to construct a new building or remodel, expand, or improve an existing building.

Construction loans work differently than traditional mortgages. With a typical mortgage, the borrower receives the full loan amount upfront to purchase a completed property. With a construction loan, funds are disbursed incrementally as construction progresses to ensure the work gets completed.

Construction loans allow borrowers to build and finance a custom home or other property tailored to their needs and specifications. The loan provides payment for land acquisition, materials, labor, permits, fees, and other costs incurred during the construction process.

These specialized loans serve an important role in real estate development by enabling new construction and renovation projects. They carry more risk than conventional mortgages, so lenders have stricter requirements and charge higher interest rates. Overall, construction loans provide an essential funding source for builders and investors seeking to develop properties.

How Construction Loans Work

Construction loan rates are a specific type of financing used to fund the building or renovating of a home or other property. The purpose of a construction loan is to provide money to pay for labor, materials, permits, and other costs associated with the construction project.

The process of getting a construction loan typically involves working with a lender to secure financing before the building phase begins. Borrowers will need to provide detailed plans, budgets, permits, and other documentation to apply for the loan. If approved, the lender will issue periodic payouts of the loan amount as certain stages of the construction are completed and inspected. This provides oversight on the project and ensures the funds are used as intended.

Construction loans are short-term loans that are paid off once the project is finished. At this point, borrowers will often get permanent financing to pay off the construction loan. This type of financing is essential for those looking to build a custom home or complete major renovations when the costs exceed available cash on hand. It allows the project to move forward while providing the lender some control over the process.

Types of Construction Loans

There are a few main types of construction loans to be aware of:

Single-Close Construction Loans

A single-close construction loan rolls the construction loan and permanent mortgage into one loan. This means you only need to close on the loan once. With a single-close loan, the construction period has a variable interest rate, and once construction is finished, it converts to a fixed-rate permanent mortgage.

Single-close loans allow you to lock in your long-term interest rate upfront. This provides stability and can protect you from rising interest rates during the construction period. However, single-close loans usually have stricter approval requirements.

Two-Close Construction Loans

With a two-close construction loan, you get a short-term loan just for the construction period. Once construction is finished, this loan must be paid off, and you’ll need to get a new permanent mortgage loan to pay off the construction loan.

Two-close loans offer more flexibility, as you can shop around for the best rates and terms on your permanent mortgage after construction is complete. However, you face some interest rate risk as rates could rise between closing on the construction loan and obtaining the permanent financing.

Owner-Builder Construction Loans

Owner-builder loans are designed for owner-builders who want to act as their own general contractor. This allows you to save on contractor fees, but requires you to manage the construction yourself.

Lenders usually have stricter requirements for owner-builder loans because of the increased risk. You’ll likely need a higher down payment and strong DIY experience.

Custom Construction Loans

Custom construction loans are for building a home from the ground up on land you already own. Rates and terms vary by lender. Custom loans allow you to build your dream home on your own property. However, they tend to come with higher rates and costs compared to loans for spec home construction.

Construction-to-Permanent Loans

Some lenders offer construction-to-permanent loans, which blend features of single-close and two-close loans. The construction portion has a variable rate that converts to a fixed-rate permanent loan after completion. However, you can still choose your own lender for the permanent financing.

This allows you to lock in an interest rate upfront while maintaining flexibility on your long-term financing. However, these loans are less common than traditional single-close and two-close products.

Construction Loan Rates

Construction loan rates are typically variable and pegged to a benchmark rate like the Prime Rate or LIBOR. This means the interest rate will fluctuate over the course of the construction loan as the benchmark rate changes.

The average interest rate for construction loans right now is around 5-7%. However, construction loan rates can vary significantly depending on a number of factors:

The best way to find current construction loan rates is to shop around with multiple lenders. Compare their rate quotes and fees to find the best overall loan option for your construction project. Locking in your rate as soon as possible can help guard against rate hikes during the building process.

Construction Loan Fees

There are various fees associated with construction loans that borrowers should be aware of. These fees can add a significant cost to the loan, so it’s important to understand and budget for them.

Origination Fees

This is a fee charged by the lender to process, underwrite and close the construction loan. It’s typically 1-2% of the loan amount. For example, on a $200,000 construction loan the origination fee could be $2,000 – $4,000.

Inspection Fees

The lender will require periodic inspections of the construction by a third-party inspector. This helps ensure the work is being completed according to plan and reassures the lender that their investment is sound. Expect to pay inspection fees ranging from $200 – $500 per inspection. The number of required inspections varies by lender, but expect around five inspections over the course of construction.

Other Fees

There are also other fees such as:

It’s important for borrowers to understand these fees and factor them into the total cost. Construction loans require more upfront costs compared to traditional mortgages. But with proper planning, these costs can be managed.

Construction Loan Requirements

Construction loans have several key requirements that borrowers need to meet in order to qualify and get approved. Here are some of the most important requirements to be aware of when applying for a construction loan:

Credit Score

Your credit score is one of the main factors lenders look at when reviewing a construction loan application. In general, you’ll need a minimum credit score of 620 to qualify for a construction loan, but scores of 700 or higher are ideal and will get you the best rates. The higher your credit score, the lower your interest rate is likely to be.

Down Payment

Most lenders require a down payment of around 20-25% of the total project costs for a construction loan. This down payment acts as your equity in the project. The more equity you have, the less risk for the lender. Some lenders may allow down payments as low as 10% for borrowers with excellent credit. The down payment must come from your own funds, as you cannot finance it with another loan.

Other Requirements

In addition to credit score and down payment, lenders also look at factors like your income, existing assets, debt-to-income ratio, employment history, and experience with construction projects. You’ll need to demonstrate you have enough income and assets to comfortably handle the construction loan payments. Having a lower debt-to-income ratio is better when qualifying. Most lenders also want to see that you have a reliable source of income as well as a history of managing other loans successfully. If you have experience with construction or renovations, that can work in your favor as well. Meeting all the requirements demonstrates you are a low-risk borrower.

Construction Loan Lenders

There are several types of lenders that offer construction loans, including:


Banks are one of the most common sources for construction loans. Large national banks like Bank of America, Wells Fargo, and Chase offer construction loans, as do many smaller regional and community banks. The advantages of getting a construction loan through a bank include established lending experience, low interest rates, and the ability to bundle your construction loan with other banking services. The downside is that bank loans often come with stricter approval criteria and more paperwork.

Credit Unions

Like banks, credit unions also commonly provide construction loans. Credit unions are member-owned nonprofits, so they may offer better customer service than large banks. Credit union construction loans often have lower interest rates and more flexible qualification requirements than banks. However, credit unions usually have less capital to lend than big banks, so individual loan amounts are lower. Credit unions are a good option for smaller construction projects.

Online Lenders

Online lenders like LendingTree and Lightstream offer construction loans directly to borrowers via their websites. Online lenders have minimal overhead, so they can pass savings on with lower interest rates. Approval is quick and applications are completely online. However, online lenders typically cater to borrowers with good credit and high incomes. Loan options may be more limited compared to banks and credit unions.

Construction Loan Process

The process of obtaining a construction loan generally follows these steps:

1. Pre-Qualification

2. Find Land and Finalize Plans

3. Loan Application

4. Loan Approval

5. Closing and Initial Draw

6. Construction

7. Conversion to Permanent Mortgage

Following this process carefully ensures you receive funding at each stage of construction. Communicating closely with your lender and builder is key.

Construction Loan Risks

Taking out a construction loan carries some inherent risks that borrowers should be aware of. Being prepared and taking steps to mitigate these risks can help ensure a smooth construction loan process. Some of the key risks include:

Cost Overruns

It’s not uncommon for construction projects to go over budget. Unexpected costs for materials, labor, or delays can quickly add up. This puts borrowers at risk of not having enough money to finish the project. Having a sufficient contingency fund and getting a locked-in construction loan amount that exceeds the expected costs can provide a cushion. Closely overseeing the budget and timeline can also help avoid major overages.


Construction delays from weather, materials shortages, labor issues, or other factors can increase costs and extend the loan term. This results in more interest payments. Careful planning of the timeline and maintaining frequent communication with the construction team helps minimize delays. Build in a buffer to the timeline as well.

Value Depreciation

If the real estate market declines during construction, the completed home may be worth less than anticipated. This makes it harder to get a permanent mortgage after construction or recoup investments if selling. Seeking construction loans when the housing market is strong can mitigate some of this risk.

Lender Issues

If the lender experiences financial problems, it could freeze loan disbursements mid-project. Borrowers should vet lenders carefully for financial stability. Having a backup plan or alternative lender can help in case issues emerge with the primary lender.

With proper planning, financial contingencies, and careful oversight, borrowers can effectively manage the risks of construction loans. Understanding these risks upfront makes for a less stressful loan process.


Construction loans are a great financing option for building a new home or completing major renovations, but they require research and preparation. Borrowers need to shop around and compare rates, fees, requirements, and processes across multiple lenders. It’s also critical to understand the risks and plan accordingly with sufficient assets, credit, income, and contingency funds.

Overall, construction loans allow you to fully customize and create your dream home. But make sure you only work with reputable lenders and builders, closely manage the project, and don’t overextend your budget. Conduct thorough due diligence and consult professionals like lawyers, accountants, and insurance agents when needed. With proper planning and caution, a construction loan can successfully turn your property vision into reality.

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