HELOCs for New Construction

Can you open a home equity line of credit (HELOC) to finance new construction? In short, yes, you can. If you’d like to use a HELOC for construction, as long as you’re a homeowner and have established sufficient equity in your home, you may be eligible.

In this article, we’ll answer whether you can—or even should—use a HELOC for new construction, given your circumstances. You’ll also get a rundown of the best HELOCs available to homeowners and how they work, so you’ll know whether this is the right option for your future project.

Best HELOCs for new construction

Here are three top lenders for HELOCs for new construction.  

Figure

Bethpage FCU

LendingTree

How does it work to finance new construction with a HELOC? 

Acting as a second mortgage, a HELOC allows you to borrow against the equity in your home in the form of a revolving credit line, similar to a credit card. With many HELOCs, you can borrow as much as you need when you need it, as long as it’s within the draw period—the time frame you’re allowed to borrow funds.

If you’re financing new construction with a HELOC, you’ll leverage your current home’s equity as collateral. You can use the funds you need—often through a card or check the lender provides you—as your building project progresses, a solid benefit if you run into unexpected costs.

HELOCs offer long repayment terms, often 20 years, but many have variable interest rates that can fluctuate. Your payments may vary as you repay the loan, so be sure you understand the terms to decide whether it aligns with your long-term financial plans.

You can find a HELOC at a bank, credit union, or other lending institution. To qualify, you’ll often need at least 15% equity in your home, and you may only be able to borrow 80% to 90% of your equity.

How does a HELOC compare to a construction loan for a new build?

Both products have distinct advantages and disadvantages when deciding between a HELOC and a construction loan. 

	HELOC	Construction loan
Funding	Based on home equity	Specifically for construction
Interest rates	Lower initially, may increase later	Fixed rates for the duration
Qualifications	Equity in your current home	Detailed plans and timelines
Flexibility	Borrow as needed	Limited to construction costs only
Repayment terms	Long-term, often 20 years	Short-term, typically 3 – 5 years

Pros and cons of HELOCs

It’s smart to consider the pros and cons of any financial product before you decide to use it. Here are several pros and cons associated with a HELOC, especially compared to a construction loan.

Pros

• Flexibility

  You can access funds as needed during your new construction, typically up to 10 years from the date you opened the HELOC. You can use a HELOC for anything, not just construction.

• Lower initial interest rates

  This can be appealing for managing cash flow.

• Interest-only payments

  Some HELOCs offer this option in the initial years, so your payments will be lower during this period.

Cons

• Collateral

  Because your home is the collateral, your lender can foreclose on it if you can’t repay your loan.

• Equity

  To qualify, you must have equity in your home, often at least 15%.

• Variable interest rates

  Many HELOCs have variable rates, which may increase after the initial period, raising the overall cost of the loan.

• More stringent credit score requirements

  Depending on where you apply, the minimum credit score to qualify may be high.

• Limited loan amount

  The loan amount is based on the current value of your home, which might limit your borrowing ability.

Pros and cons of construction loans

Here are the pros and cons of a construction loan compared to those of a HELOC.

Pros

• Construction only

  The loan is designed to fund new construction or extensive renovation projects, which can be helpful if you want to make sure you only use the funds for that purpose.

• Fixed interest rates

  You’ll likely get fixed rates for the duration of the loan, which can make budgeting easier.

• Conversion to mortgage

  These loans can typically be converted into a traditional mortgage after completing the project.

Cons

• Savings

  Because unexpected costs may come up, the lender will likely require you to have savings in addition to your borrowed funds.

• Higher monthly payments

  A short loan term means your monthly payments may be higher than a HELOC.

• Detailed requirement

  You’ll need to provide the lender with detailed construction plans and timelines, which can be difficult to predict.

• Time pressure

  A short-term loan may put pressure on you to complete the project in time.

Your finances and construction project will determine whether a HELOC or a construction loan is the right choice for you.

How to apply for a HELOC for new construction

If you decide to apply for a HELOC for new construction, make sure you compare the best options for your needs. Then, check whether you meet the eligibility requirements and take the right steps to get approved. 

Here’s a step-by-step guide:

Eligibility requirements

1. Home equity: You need sufficient equity in your home. Many lenders require at least 15% equity.
2. Credit score: A good credit score is important to lenders. Some may require a minimum FICO score of 620.

Application process

1. Research lenders

Look for lenders that offer HELOCs for new construction. Check out our full reviews of the HELOCs above to compare their terms, rates, and other details side by side.

2. Gather the required documents 

The lender may require documents such as proof of income, tax returns, and property information. To save time, locate these documents before you apply.

3. Submit your application 

Fill out the lender’s application form, including sharing the purpose of the HELOC. Once you submit it, the lender will perform a credit check to assess your creditworthiness and determine the terms of your HELOC.

4. Appraisal and approval 

The lender may require an appraisal of your home to determine its value and confirm your equity. Once approved, you can access the funds.

5. Draw period and repayment 

During the draw period, typically 10 years, you can access funds from the HELOC for construction expenses. You’ll likely make interest-only payments, and after this period, you’ll start paying on the interest and principal.

Using a HELOC for construction can be practical if you need flexibility. Just be sure to consider whether you can manage variable interest rates and the long-term commitment involved. Always have a plan for how you’ll repay your loan.

FAQ 

What disqualifies you for a HELOC?

Several factors may disqualify you from a HELOC. These include a low credit score, insufficient home equity, unstable employment history, or a high debt-to-income ratio. In some cases, insufficient income or a negative payment history can also lead to a denial.

Can you use a HELOC to buy more property?

Yes, it is possible to use a HELOC to buy additional property. However, consider the risk associated with using your primary residence as collateral. Lenders will need to ensure you meet credit and income requirements before granting the loan.

What kind of credit score do you need for a HELOC for new construction?

Typically, a credit score of at least 620 is required to secure a HELOC for new construction. However, qualifications vary by lender. Some might require a higher score, especially if the loan amount is significant.

How we chose the best HELOCs for new construction

Since 2018, LendEDU has evaluated home equity companies to help readers find the best home equity loans and HELOCs. Our latest analysis reviewed 850 data points from 34 lenders and financial institutions, with 25 data points collected from each. This information is gathered from company websites, online applications, public disclosures, customer reviews, and direct communication with company representatives.

These star ratings help us determine which companies are best for different situations. We don’t believe two companies can be the best for the same purpose, so we only show each best-for designation once.

Recap of the HELOCs for new construction