The Average Construction Loan Interest Rate

As the housing market has shifted, builders and developers have reported tighter credit conditions from lenders. Some of the most common ways they have been forced to deal with these tighter conditions include higher interest rates on construction loans (cited by 80 percent of those responding to NAHB’s AD&C Financing Survey), reduced loan-to-value or loan-to-cost ratios, and reduced amount they can borrow.

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A construction loan is a short-term loan used to finance the average construction loan interest rate of a new home. It is not backed by anything that already exists, so it is considered riskier than a mortgage. Lenders usually require a down payment of 20% to mitigate this increased risk. Because of the high risk, the average construction loan interest rate is typically higher than a traditional mortgage rate.

When shopping for a construction loan, it is important to find a lender with experience in this type of financing. This will ensure that you understand the entire process and get the best rates. Ideally, you should also look for a lender with flexible down payment requirements and credit score requirements. Some lenders have a minimum down payment requirement of only 10% and others will allow you to apply with a credit score as low as 620.

A good place to start is with a local or regional bank, as they tend to be more familiar with the ins and outs of construction loans. You can also shop around to see what rates other national and large regional banks are offering. In most cases, these larger banks price their construction loan rates to the Secured Overnight Financing Rate (SOFR). However, you can sometimes negotiate with them to lower the rate.

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