The thought of investing in your dream home may seem intimidating, but why settle for a house that only partially meets your needs?
With prices on the rise and limited inventory available for purchase, many savvy homebuyers are taking matters into their own hands by building or totally renovating—making sure every last detail is perfect from start to finish.
But how are they accomplishing this? With construction loans. And for those looking to create a home with high-end finishes, spacious rooms, and top-of-the-line amenities, a jumbo construction loan is definitely worth considering.
With this type of mortgage financing option, there's no limit—allowing for even greater customization.
But before you apply, it's important to understand the basics of this unique lending product. Here's what you need to know about jumbo construction loans.
TLDR Key Takeaways
- A jumbo construction loan is designed for projects that require more funding than a traditional conforming loan can provide.
- When taking out a jumbo loan for construction, you have several options available to fit your financial situation.
- Generally speaking, W2 employees must meet different standards than their self-employed peers when applying for a jumbo construction loan.
What is a Jumbo Construction Loan?
A jumbo construction loan is specifically designed to finance the costs of building a home from the ground up or completing extensive renovations on an existing home, where the costs for construction exceed the limits for a conforming loan.
As of 2023, the Federal Housing Finance Agency (FHFA), along with Freddie Mac and Fannie Mae, set the limit for a single-unit conforming mortgage at $726,000 for most of the continental US; however, in some states, the threshold is higher.
So if your building plans exceed this amount, you'll need to take out a jumbo construction loan to cover the costs of materials, labor, and other associated expenses during the building process.
These loans are typically distributed in "draws" throughout construction. Every time a milestone or construction phase is completed, additional funds are released to complete the next stage.
For example, lenders distribute a set amount to complete the foundation and framework. Once that process is completed and inspected, then the lender will release the next wave of funds for plumbing and electrical work. And so on and so forth.
It should be noted that these loans typically come with higher interest rates and heftier requirements since the government doesn't back them.
Types of Jumbo Construction Loans
Like conventional loans, you can obtain several different types of jumbo construction loans depending on your financial situation. It's essential to consider the advantages and disadvantages of each before you choose which one is right for you.
Construction-to-Permanent
A construction-to-permanent loan is ideal for those who want to build their dream home without worrying about acquiring multiple loans at different stages of the construction process.
After all, most homeowners aren't ready to repay the loan in full once their house is built. They want to roll the costs into a traditional mortgage. And these loans are designed to speed up the process of obtaining a mortgage and building a home.
A single loan is used for both building and financing, eliminating the need to obtain two separate loans for construction and long-term financing.
Because this type of loan combines two distinct phases within one loan, it's often referred to as a single-close loan.
Advantages:
- Only have to pay closing fees once
- Don't have to secure a mortgage after the home is complete
- Borrowers only typically only have to make interest payments during the construction phase
Disadvantages:
- Interest rates are usually adjustable, and they are typically higher during the construction phase
- Potentially have a larger down payment
- Borrowers may need to provide additional documentation throughout the process, which can add time and complexity
Construction-Only Loan
While a construction-to-permanent loan combines two loans into one process, a construction-only loan focuses exclusively on financing the cost of building or renovating a home.
Once the construction is complete, homeowners either have to:
- Pay back the amount in full
- Search for permanent financing
This type of loan is commonly used by owner-builders or people who want to build or renovate a home but don't have the capital to do it all at once.
However, for those needing permanent financing after building is complete, construction-only loans are the first part of a two-close loan process since homeowners must complete another closing to secure a mortgage.
Advantages:
- Finance construction without having the full amount of capital upfront
- Lower down payment
- Lending limits may be higher
Disadvantages:
- Considered risky for lenders, which can result in additional hurdles for borrowers to overcome
- Must pay closing costs twice if they need to find permanent financing
- May not get the best rates when searching for permanent financing
- Typically short-term and must be paid back in full once construction is complete or up to one year
Renovation or Rehabilitation Loan
A renovation or rehabilitation loan is ideal for homeowners who want to make major repairs or upgrades but can't afford to do so out of pocket, through a traditional mortgage, or through a line of equity.
With these types of loans, you use the funds to pay for any repairs you need, such as replacing a roof, painting walls, remodeling bathrooms or kitchens, and more. It covers the cost of materials needed for the renovation project.
This loan also enables borrowers to purchase a home in need of repairs, complete the renovations, and have one mortgage that covers both the purchase price and the cost of rehabilitation—saving you time, energy and money in the long run.
Advantages:
- Allows you to purchase a home that needs repairs and make the repairs with one loan
- One monthly payment that combines reno costs and mortgage
- Loan amounts are based on "as-completed" (most up to 75% of this value)
Disadvantages:
- Borrowers must use approved contractors and materials if specified by their loan package
- Mortgage insurance is often required
- Repairs must be completed within specific time limits (6-12 months)
Construction Loan Requirements: W2 vs. Self-Employed Individual
The requirements for your jumbo construction loan will vary depending on the type of construction loan you want to use, the lender, and whether or not you're a W2 employee or self-employed.
Both types of borrowers will have to meet their lender's criteria for approval before their construction loan can move forward, but here's a quick chart to show you some of the different requirements for W2 and self-employed individuals.
Additionally, most lenders will require a budget that details the project's estimated costs and how you plan to pay for them.
What Are the Steps To Get a Construction Loan?
Getting a construction loan can be a complicated process, but if you have the right information, it's easier to understand what you should expect. Here are the basic steps to getting a construction loan:
Step 1: Find a Lender
Start by researching local banks and credit unions that offer construction loans. Make sure you find an experienced and qualified lender specializing in these types of loans and understand all of the loan terms before you apply.
For example, some lenders may allow you to bundle your property purchase and construction costs together, while others will want you to have purchased a plot of land before they offer to finance. This way, you have some equity in the property.
Step 2: Get Pre-Approved
After you've found a lender, apply for pre-approval. This will include providing financial information and possibly additional documents like tax returns or bank statements.
You'll also need to show them the plans for the project you are borrowing, such as blueprints and cost estimates.
Step 3: Hire a Contractor
You'll need to find a qualified contractor who can do the work. Ensure they are licensed, insured, and approved by your lender before signing any contracts.
If you need help finding a reliable contractor, seek recommendations from friends and family who have built their own homes or utilize resources like local Home Builders' Associations for referrals in your area.
A little bit of research will pay dividends when selecting the perfect contractor for getting the job done.
Step 4: Complete the Application
After all your documents are ready, including finalized plans, submit an official loan application to the lender. This will get the ball rolling on your project.
From there, your lender will likely send out an appraisal and inspection to kick off your construction loan process.
How to Increase the Odds of Getting a Jumbo Construction Loan
Following some simple tips will increase your odds of getting the loan you need to build your dream home. Here are five tips to get you started:
- Have a good credit score: While many programs will let you take out jumbo loans with credit scores of 680, a higher credit score will increase your chances of getting the loan.
- Prepare a reasonable down payment: Many construction loans require a minimum of 3% down payment, but the more money you put down on the construction, the lower the loan amount will be and the more likely you are to get it.
- Optimize your debt-to-income ratio: Lenders love seeing DTIs of 36% or lower, so try to ensure you get this number as low as possible.
- Have a solid plan: Make sure you have a detailed budget, timeline, and other necessary documents ready to show the lender.
- Research different lenders: Different lenders have different requirements, so it's worth looking around to find the best deal for you.
Do Construction Loans Require PMI?
Generally speaking, many lenders will require private mortgage insurance (PMI) if you put less than 20% down.
Get a Construction Jumbo Loan with MDL
At Modern Day Lending, we understand that a construction jumbo loan is a substantial financial commitment. That's why our team of mortgage professionals is dedicated to providing you with the best financing options and terms.
While the other big banks want you to jump through all kinds of loops, we strive to make the process as simple and straightforward as we can. All you need for pre-approval is:
- Proof of income for the past two years
- Good credit score
- Personal asset statement
- Driver's license
We offer competitive rates, low closing costs, flexible financing options, and fast approvals.
Additionally, we are committed to providing excellent customer service and helping you every step of the way. We work closely with each customer to develop an individualized loan plan, considering their unique needs and goals.
If you're ready to get started, reach out to a member of our team and get a jumbo loan with a low down payment.
