100 Percent Financing for New Construction Home Loans

If you are looking for 100 percent financing to build a new home, you have an uphill battle ahead of you.
 Construction loans are widely viewed to be among the riskiest loans in the entire lending industry. 

  Options for 100% Loans

Your best bet for getting 100% financing is to obtain a loan through a federal program. Eligibility is based on a variety of factors, and these programs are not available to everyone.
U.S. Department of Agriculture

These loans are used to encourage home ownership in rural areas. The USDA guarantees the loans, which is what allows you to obtain 100% financing. You're required to build in certain geographic areas of the United States and have a household income within certain limits, depending on the area where you plan to live.
Veterans Administration

Similar to the USDA program, this is also a loan guarantee program. The difference is eligibility is tied to the applicant and not to the location of the home. While you can build your home anywhere you wish, you must have served in the military or be the surviving spouse of a deceased service member to qualify for the program and receive 100% financing.

If you don't meet the qualifications to be accepted into these programs, you are basically out of options since it is near impossible to find 100% financing directly through a lender, either nationally or regionally. A private lender may be your only other option, but these are not easy to find. 

Why 100 Percent Financing Is Rare

Home loans are supposed to be somewhat safe for lenders since the house is acting as collateral. Unfortunately, with construction loans the house has not been built yet, so there is no real collateral. The bank has to guess how much the house is going to be worth when it is done to make sure that it is not lending you more than the house is worth, but it is hard to put a value on something that exists only on paper.

Down Payment Requirements

You need to make a down payment to give the bank a cushion in case the house doesn't end up being worth what you thought it was. In fact, not only is 100 percent financing not really an option, but in many cases, you actually have to put down more than you would with a newly built home. Many lenders require 25 percent or more to be put down for a loan for new construction as opposed to the standard 20 percent that is typically required to buy an existing house.

A Changing Market

The market can also make a difference in whether you can get 100 percent financing. Prior to the mortgage meltdown that took place in '07 to '09, it was sometimes possible to finance a new construction loan with no money down. However, in the very tight credit market that followed the wave of foreclosures and defaults, it became next to impossible for borrowers to get 100 percent financing to construct a new home.

How New Construction Home Loans Work

When you get a construction loan, it is usually a short term loan designed to last only the length of the construction process. Most are under a year in length, and at the end of the term of the construction loan it is supposed to convert to a traditional mortgage. As such, most construction loans are designed to have a balloon payment at the end. You borrow the money (normally under an interest-only mortgage) and as the construction goes on, the builder takes several "draws" from the total amount you borrowed until all the money has been borrowed at the end. Each time there is a draw, the house is appraised or  inspected to make sure the money is being used well and the building is going according to plan.

Problems can exist. When construction is finished, the home may not be worth what was lent. You may have a problem because no mortgage lender is going to want to lend you money to pay off a loan that is worth more than the house. Most construction lenders, as a result, require you to make a down payment in order to make sure they are protected.

Exploring Your Options

The best option is to wait to get enough money to put down. If this won't work, you may have a few other choices to explore:

• See if you can get builder financing. This is where your builder essentially carries the loan and you don't pay him until the house is done and you get a new loan. This may or may not work, depending on your credit and the willingness and ability of your builder to enter into such a financing agreement
• Consider trying to stack loans. This would involve getting multiple loans, one to cover the bulk of the mortgage and one to cover what would be your down payment. This too may be a long shot however, especially in tougher credit markets.

If neither of these options work for you, it may be better for you to go with a home that is already built. This way you know exactly how much it is worth, and you have a better chance of obtaining 100% financing. Note that you may still have trouble doing so, especially if you have less than perfect credit, so it's important to discuss your options with your mortgage lender before signing any contracts.