Home Construction Loan Calculator 2023

This Page Was Last Updated: February 06, 2023
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Property Information
Construction Information
Mortgage Information

Monthly Mortgage Payment
Initial Construction Loan
First Interest Only Payment
Last Interest Only Payment
Initial Mortgage Balance

Construction Loan Amortization

What You Should Know

  • A construction loan allows you to borrow money to build a house from the ground up.
  • During the home construction process, you make interest-only payments on your construction loan.
  • Once the house is built, you can either repay the loan in full or refinance your construction loan into a new mortgage.
  • Interest rates on construction loans are generally higher than interest rates on regular mortgages.

Our construction loan calculator determines your monthly payments during construction and the monthly mortgage payment during the term of the loan. Our calculator requires basic inputs such as the cost of the land & construction, the estimated value of the completed home, length of the project, and basic loan information.

What Is a Construction Loan?

A construction loan involves borrowing funds to finance your home construction project. It is a short-term loan that is eventually either paid back in full or refinanced into a conventional mortgage. Construction loans tend to be different from other types of loans because they require a plan and possibly a licensed constructor who would be involved in the process. Construction loans are short-term loans that are usually issued for up to 12 months. They have a high interest rate because these loans are not backed by collateral and are considered risky. In addition to that, construction loans tend to have an adjustable interest rate, which means that the interest rates may change as the prime rate changes.

Average Construction Loan Interest Rate:
As of Aug 4, 2022. Rates are for informational purposes only.

How Do Construction Loans Work?

One of the main differences between a construction loan and a conventional mortgage is that a construction loan does not have collateral backing it. Since there is no collateral provided, the lenders require quite a bit of supporting documentation that outlines the nature of the construction, a clear budget, and a plan. This means that the borrowers have to clearly plan out the whole construction project before applying for a loan. Once the borrower has all proper documentation and a licensed contractor, they may be able to apply for a construction loan.

Once the borrower gets approved for a construction loan, they can start working on the project. Construction loans are structured differently than normal loans. In traditional mortgages, the borrower receives the funds and pays back the interest and principal in installments. Whereas in construction loans there is no collateral backing the loan, the lender only provides portions of the loan to the contractor directly. Once the contractor receives the money, they can complete the part of the project that is meant to be completed using the allocated money.

ConstructionLoanHouse ConstructionInterest-only paymentsConstructionCompleteLoan paidback infullLoan isrefinancedinto amortgageConstruction Loans Process

At each stage of a home building process, an inspection agent from the lender will analyze the progress and will release funds for the next step of the process. Major inspections will include building the foundation, home framework, roofing, and lastly, finishing. Each stage will have a different amount of funds disbursed to the contractor directly. By the end of the construction, all funds required will be disbursed, following which the borrower must determine whether to pay back the amount or refinance into a mortgage.

Types of Construction Loans

Construction loans are very different from conventional mortgages. There are four distinct types of construction loans that have a similar purpose but differ in terms and conditions. They may look similar, but the details of the loan and what happens after it expires differ, so it is important to understand how each type of construction loan works to get the best option for a specific project and financial situation.

Construction-Only Loan

This type of construction loan has a similar structure as an interest-only loan with a balloon payment at maturity. It implies that the borrower will pay interest-only payments while the construction is in progress and will pay the remaining principal in one payment at the end of the construction. This is a risky loan because it makes the borrower responsible for a large one-time payment. It is possible to get a mortgage on the house to pay off the construction loan. In this case, the borrower will have to pay closing costs twice, one for the construction loan and another for the mortgage. They are paid twice because the borrower will have to get two separate financial products: a construction loan and a mortgage.

This loan provides flexibility to the borrower because they may pay off their construction loan on their own. In this case, the borrower will be able to save money on interest in the long term. On the other hand, if the borrower is planning to get a mortgage to pay off the construction loan, they will have to pay closing costs twice, which may be quite expensive.

Construction-to-Permanent Loan

Construction-to-Permanent loans combine a construction loan and a mortgage in one product. This means that the borrower has to pay closing costs only once since the loan originated once. This loan has a similar structure to interest-only loans because the borrower of a construction-to-permanent loan has to pay off interest only for a specified time period and amortize the principal over years after that.

This is a good option for people who are certain that they will need to get a mortgage once the construction is complete. This type of loan allows the borrowers to avoid paying for closing costs twice, which may save up to 6% of the construction cost.

Owner-Builder Loan

This type of loan has the same structure as a construction-only loan, but an owner-builder loan does not have a contractor who works on the project and receives the money. In this case, the borrower is the builder who will oversee and work on the project. An owner-builder loan provides financing directly to the owner, but they may require certain proof that the owner is qualified to oversee the construction.

Apart from the difference in who receives the money, an owner-builder loan is very similar to a construction-only loan. A borrower has to get this loan from a lender who will provide financing in draws. Once the construction is finished, the borrower has to pay off the loan principal in full. Usually, borrowers get a mortgage to pay off the construction loan once the house is built. Since the borrower gets two separate products, they will have to pay closing costs twice.

Home Renovation Loan

This type of loan is considered a home improvement loan. Even though these loans are not considered construction loans, some them can be used to finance small projects or to cover a part of a large project. Some unbacked renovation loans are usually issued for up to $20,000, which may not be enough to build a house, but it may be enough to finish a small project such as building a staircase. On the other hand, a borrower may get backed loans such as a home equity loan or home equity line of credit (HELOC). The calculator on this page can be used as a renovation loan calculator by adjusting the inputs to reflect the renovation loan terms.

Government Construction Loan Programs

While the conventional construction loan requires a 20% down payment and high credit score requirements, additional options are available. Various governmental programs guarantee construction loans to provide access to everyday Americans. By backing the mortgage, lenders are more willing to accept traditionally riskier lenders. For example, you may qualify with a lower credit score or a down payment as low as 0%.

However, these programs come with additional nuances, such as maximum loan restrictions, income caps, or the need to live in rural towns. This section will dive into the three types of governmental construction loans and their qualification criteria.

Minimum Down Payment10%/ 3.5%0%
Minimum Credit Score500/ 580N/A
Maximum DTI43%41%
Loan Size LimitsYesNo
Income LimitsNoNo
Additional RequirementsN/AVeteran, or spouse of deceased veteran
Fee NameMortgage Insurance Premium (MIP)Funding Fee

FHA Construction Loan

The Federal Housing Administration (FHA) guarantees FHA construction loans. Their primary aim is to provide financing for low to moderate-income families so they can become homeowners. The Loan is typically available with a construction-to-permanent (C2P) methodology. However, a separate option for renovations is the FHA 203(k) loan.

An FHA construction loan allows for a minimum down payment of 3.5% with a credit score of 580. However, those with a credit score of 500 can qualify with a 10% down payment.

There are several other key requirements for an FHA construction loan:

  • The borrower must have a credit score of at least 500
  • The maximum debt-to-income ratio is 43%
  • The property must be your primary residence
  • There is a maximum loan limit that varies by county
  • You must get an FHA-approved builder
  • Payment of mortgage insurance premiums (MIPs)

VA Construction Loan

The Department of Veterans Affairs (VA) guarantees VA construction loans. The main aim of the VA is to help veterans, active military personnel, and their families construct homes.

A VA construction loan allows for a 0% down payment with no maximum loan limit. There are also no maximum loan amounts. However, finding a VA construction-to-permanent (C2P) loan can be challenging. Instead, you may find a VA construction-only loan that you can then refinance into a standard VA mortgage.

Other key requirements for a VA construction loan include the following:

  • The maximum debt-to-income ratio is 41%
  • Have a Certificate of Eligibility (COE)
  • the property must be for your primary residence
  • You must get a VA-approved builder
  • Payment of VA funding fee

USDA Construction Loan

The United States Department of Agriculture (USDA) issues USDA construction loans through their Rural Development Housing and Community Facilities Program. This program aims to improve the quality of life in rural areas by providing affordable financing.

The USDA offers different types of construction loans. One of the most popular USDA construction loans is the USDA Single Close Construction Loan. It is a Construction-to-Permanent loan, which means that the borrower needs to pay for closing costs only once.

This program is designed to construct rural homes with a 0% down payment. However, due to strict requirements, few lenders and builders partner with the program. As a result, you may need to begin with a conventional construction loan and refinance it into a 30-year USDA mortgage.

Other key requirements of the USDA program include the following:

  • You must exceed a 640 minimum credit score
  • There is a maximum debt-to-income ratio is 41%
  • You must use the home as your primary residence
  • You must meet regional income requirements
  • The property must be located in a USDA-designated rural area
  • Payment of USDA guarantee fees

How Are Construction Loan Payments Calculated?

Construction loans require interest-only payments during the life of the construction project. At each stage when more funds are disbursed the interest-only payment will increase.

This program is designed to construct rural homes with a 0% down payment. However, due to strict requirements, few lenders and builders partner with the program. As a result, you may need to begin with a conventional construction loan and refinance it into a 30-year USDA mortgage.

Other key requirements of the USDA program include the following:

  • You must exceed a 640 minimum credit score
  • There is a maximum debt-to-income ratio is 41%
  • You must use the home as your primary residence
  • You must meet regional income requirements
  • The property must be located in a USDA-designated rural area
  • Payment of USDA guarantee fee


  • Property Status = Purchase
  • Cost of Purchasing Land = $100,000
  • Estimated Cost of Construction = $400,000
  • Estimated Value of Completed Home = $500,000
  • Length of Project = 12 Months
  • Interest Rate = 3%

First Interest Only Payment = $250 ($100,000 x 3% / 12 months)

Final Interest Only Payment = $1,250 ($500,000 x 3% / 12 months)

As the above example demonstrates, initially, the only funds that are borrowed are the $100,000 for the purchase of the land. Hence, the first interest payment is only $250, because it is based on the $100,000 and not the full loan amount of $500,000.

Once the construction project is completed and all the funds have been used, the last interest payment is on the entire loan amount of $500,000 resulting in $1,250.

Once the construction project is over the borrower can repay the entire loan or refinance it into a mortgage. In the above example, if the borrower refinances the amount into a mortgage, the entire $500,000 deducting any down payment will be amortized into a 29-year mortgage. It is 29 years because the first year was spent in construction. Using our amortization calculator, we can calculate the monthly mortgage payment which will be $2,150.

Frequently Asked Questions

How Do I Estimate Construction Costs?

Estimating the construction cost means simply finding out how much it costs to build a house. There are several factors that contribute to the construction cost of a house:

  1. Land - You will first need to purchase land on which you will build your house on. The cost of the land can range anywhere from $5,000 - $150,000 depending on the square footage and location. You can estimate the cost of land financing by using a land loan calculator.
  2. Site Work - This includes costs for grading, excavation, construction and anything that is not related to building the physical structure of the house. The cost to do site work can range from $2,000 - $6,000. The exact cost will depend on the size of the land and the condition it is in.
  3. Floor Plan - You will have to design the layout of the house, its rooms, bathrooms, kitchen, either on your own or with the help of an architect. This can cost you $2,000 to $5,000.
  4. Foundation - The cost of foundation includes the material and labor for breaking ground on your new home. Depending on the type of foundation, the bill can be from $5,000 to $25,000.
  5. Framing - One of the more hefty costs, framing includes building the outer structure of the house by fitting together pieces for support. The cost of framing a house will depend on the size of the house and the materials used, however, on average, it costs $20,000 to $50,000 to frame an entire house.
  6. Exterior - Building the exterior of a house means covering the entire area of the house that is exposed to the outside. The exterior can cost $30,000 to $55,000.
  7. System Installation - The systems may include the HVAC system, the electrical and the plumbing system. Each of these systems on their own come at a high cost. Therefore, the total cost of system installation can go up to $75,000.
  8. Interiors - The interior part of a house includes everything inside the home from flooring, painting, and insulation to appliances and plumbing features. Building the structure and exterior is only one part of the job, so be prepared to spend a substantial amount of money and time inside the home as well. The cost of the interiors will depend on the materials and appliances that you choose to use. However, prices range from $50,000 to $150,000.

By allocating how much money you will spend on each category of costs and adding them up, you will get a rough estimate of what construction will cost you.

What Happens at the End of a Construction Loan?

At the end of the construction loan, once the home has been built, you have two options. You can either repay the balance of the loan and the interest payments that you owe in full or you can take another mortgage and refinance your construction loan with your new mortgage.

Are Construction Loan Interest Rates Higher Than Typical Mortgage Rates?

Contrary to regular mortgages, construction loans are considered riskier by lenders since if the borrower defaults on the payments throughout the loan, the lender will not have collateral to collect. This is why lenders charge higher interest rates on construction loans than they do for typical mortgages where they can simply sell the house and get their money back if the borrower defaults on the payments. +

What Happens When You Go Over Budget on a Construction Loan?

It can happen that in the process of building your house, some of your actual expenses turn out to be higher than what you had forecasted before you started the project. Some of the typical unforeseen costs include the increased price of materials, additional labor needed, or special permits required. Unfortunately, if for any reason, your construction project goes over budget, you will have to pay the difference out of pocket or take out a second loan to cover the difference.

Can I Get a Construction Loan with No Down Payment?

Usually, a borrower may not be able to get a construction loan with no down payment using a conventional loan. On the other hand, there are two government-backed construction loans that do not require any down payment. Not everyone can be eligible for these loans, but it may be worth considering them if a borrower is short on cash.

  • VA Construction Loan - This loan allows military service members, veterans, or their spouses to borrow money to purchase land and build a house on it. With a VA construction loan, you do not have to make any down payment. On the other hand, you may have to pay a VA Funding Fee when applying for a construction loan.
  • USDA Construction Loan - This loan offers a number of benefits to borrowers, such as a 0% down payment, low mortgage rates, and USDA mortgage insurance rates. However, the bad news is that only a few lenders offer USDA construction loans, and even the ones that do have strict eligibility requirements by the USDA.
  • Any calculators or content on this page is provided for general information purposes only. Casaplorer does not guarantee the accuracy of information shown and is not responsible for any consequences of its use.