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Home Funding Do you need a down payment for a construction loan?
  • Funding

Do you need a down payment for a construction loan?

By
John Pearson
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December 19, 2018
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    Do you need a down payment for a construction loan?

    It’s an exciting moment when you realize that you’ve found the right plot and got planning permission for your dream home or construction project.

    But, the problem is that you need money to build anything; if you don’t have enough then you’re going to need to find a construction loan.

    The problem is that you actually need several things to get the construction loan. It doesn’t matter if you use a reputable firm like Stornoway Capital Partners or a more dubious company; they will want to share the risk with you.

    In fact you should consider the finance before you try for planning permission or spend your money on a plot. There are several things they will need:

    The Down Payment

    The answer to the question of needing a down payment is emphatically yes. Main stream banks will not usually lend you the funds you need because a construction project is high risk; they have nothing to secure the funds on until the building has been created.

    That’s why you need specialist lenders and why they need to see a down payment.

    The usual amount is between 20 and 25% of the build. This should be enough for you to purchase the plot and start getting the foundations in place. At this point you are heavily invested in the project and the loan company will feel more secure lending you the funds for the next stage of your build.

    The Plans

    Before you can get any money, even with your down payment the lender will want to see the plans for your build. These should be accurate drawings that show where the house is going to sit, the number of rooms, vies and the land surrounding it.

    These are important facts to help the lender decide what the project will be worth when it is finished. The greater the final value the more funds they will be able to lend you to get it built.

    Budget

    Alongside the plans it is essential that you have a budget. This should show every aspect of the build and a cost. You’ll be able to use this to calculate how much the construction project will cost.

    However, before you use this figure it is advisable to add 25% of the build cost; this is your safety net to cover unforeseen issues and there will be some.

    It is important to understand that a lender will almost certainly want to see a qualified builder completing the work. If you are not a builder you need to factor in the cost of a builder or you may never get the project off the ground. Again this all relates back to the risk that the lender is taking when they lend you the funds.

    In short you will need at least 20% of the cost yourself; the more you have the better. If you approach the lender with these funds and a detailed plan you’ll stand a good chance of securing the funds you need.

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    John Pearson
    John is a serial entrepreneur and writer who is passionate about helping small businesses launch and grow. His work has been featured in Huffington Post, Entrepreneur, and Forbes.

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