Finding the right lot and building a second home is a dream that can become a reality. Although, finding a low down payment second home construction loan is a little tougher. Fortunately, we provide construction perm loans to build a vacation home. Whether you own land already or want to buy land and build, we provide up to 90% financing. Although for current landowners, it is possible to build a second home with no down payment.
Construction Loan Down Payment
Although, building a primary residence is only 5% down payment (zero down payment for VA eligible borrowers), a second home construction loan allows as little as 10% down payment. Second home down payment for new construction may come from several sources including…
- Lot equity
- Checking, savings, or other bank accounts
- Retirement loan or liquidation
- Gift funds to cover closing costs and anything after borrower’s minimum 5% down
- Home equity loan against primary residence
Whichever the down payment source, it could provide a wonderful private getaway to enjoy.
Build on Own Lot
Existing landowners have a great advantage in that it allows an owner to use the as completed value rather than price. Conversely, buying a lot with a construction loan requires using the lot plus the build cost. Then 10% down payment is applied to the total price. Although if the land is owned just a day, the loan is based on the as completed value rather than the price. Even having a loan on a lot is ok, it would just need to be paid off at the construction closing.
Therefore a home that appraises for higher than the cost, allows the owner to use the equity as down payment! If the property appraises for enough, it is possible to include the closing costs and bring no money to closing. So, if there is enough equity where borrowing up to 90% of the as completed value covers everything, it could be no cash to close. Another advantage is the appraised value is known before the construction closing as the appraiser appraises the land and the plans up-front.
Higher Loan Limits Helps to Build a Second Home!
Potentially each year, conforming Fannie and FHA loan limits increase to follow home price increases. Now, 2020 conforming loan limits have exceeded half a million dollars. So, it is possible to borrow up to $510,400 for building a single family home. Check out the chart below that shows how much higher the second home build cost could be while staying within the conforming loan limits!
|Max Loan Amount||LTV||Land & Home Price|
Second Home Construction Loan Rates
When it comes to building a second home, the monthly payment is key. Although there are several factors that make up the mortgage payment, the interest rate is one of the important factors. While building a vacation home, there are 3 interest rate options.
- Interest Rate Cap – Sets the maximum interest rate
- Extended Rate Lock – up to 180 days after construction closing
- Floating – Usually only used if using a two-time construction perm closing
Deciding which rate options works best for a borrower depends on several factors including time to build the home, current interest rates, and how sensitive the borrower is to moving rates. For instance, taking longer than 6 months to build would mean using the rate cap option. Unlike rental property interest rates, second home loan rates usually match primary residence rates.
Second Home PMI
Most do not like to hear PMI as part of their mortgage payment. Yet, mortgage insurance allows for someone to build, buy, or refinance over 80% of appraised value. These days, PMI rates are very low. Especially for borrowers with high credit scores and low debt to income ratios. PMI options may include traditional monthly PMI or paying for it up-front. Finally, avoid PMI altogether by putting down 20% or having 20% equity in the property (if already owns the lot).