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Home Equity HELOCs

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.  

Company
Best for…
Rating (0-5)
Best overall
4.9
Credit union
4.7
Marketplace
4.5

Figure

Best overall

4.9 /5
LendEDU Rating

Why we picked it

Figure stands out as the best overall HELOC lender due to its exceptional combination of speed, competitive rates, and customer service. Known for its smooth and efficient lending process, Figure ensures that borrowers can access funds quickly, making it ideal for time-sensitive projects such as new construction. The platform’s competitive interest rates provide affordability, and its transparency ensures borrowers know what to expect. Figure’s award-winning customer service supports users throughout the borrowing process, making it a top choice for a HELOC.

  • Quick access to funds for timely project execution
  • Competitive interest rates
  • Top-tier customer service
  • Easy navigation for tech-savvy customers
Eligibility requirements
  • Credit score: Minimum credit score of 620
  • Income: Sufficient income to demonstrate the ability to repay the loan
  • Equity: At least 20% equity in the home being used as collateral
  • Employment: Stable employment history or consistent income if self-employed
  • Property: Must be a single-family residence, condo, or townhouse
Repayment details
  • Term lengths: Repayment terms range from 5 to 30 years.
  • Interest rates: 7.75%16.45% fixed APR
  • Repayment structure: Interest-only payments are allowed during the draw period, transitioning to principal and interest payments during the repayment period
  • Prepayment penalty: No prepayment penalties, allowing borrowers to pay off their loan early without additional costs

Bethpage FCU

Best credit union

4.7 /5
LendEDU Rating

Why we picked it

Bethpage FCU is an excellent choice for those who prefer the benefits of a credit union. It offers its members a range of advantages, including a fixed low introductory rate for creditworthy borrowers and no fees. 

Bethpage also provides a variety of loan options, catering to different financial needs and goals. Whether you’re funding a new construction project or any other financial endeavor, it’s a versatile and reliable option for securing a HELOC.

  • Membership benefits: Exclusive perks for credit union members.
  • 12-month intro rate of 6.99% for VantageScores of 720 and up; then a variable rate
  • No application, origination, or appraisal fees or closing costs
  • Borrow $10,000 – $1 million
Eligibility requirements
  • Membership: Must be a credit union member (membership is open to anyone who opens a $5 savings account)
  • Credit score: Preferably a credit score of 660 or higher
  • Income: Proof of stable income to support loan repayment
  • Equity: At least 15% equity in the home (25% for the low intro rate)
  • Property: The property must be located within the geographic area the credit union serves (Not available in Texas)
Repayment details
  • Term lengths: 10-year draw period; 20-year repayment period
  • Interest rates: 12-month introductory rate starting at 6.99% APR for VantageScores of 720 and up
  • Repayment structure: Interest-only payments are an option during the draw period, followed by principal and interest payments
  • Prepayment penalty: No prepayment penalties, allowing early repayment without additional fees

LendingTree

Best marketplace

4.5 /5
LendEDU Rating

Why we picked it

LendingTree is the best marketplace for HELOCs, offering borrowers a wide range of options from various lenders. This platform allows users to compare rates and terms, ensuring they find the best possible deal for their financial needs. LendingTree’s extensive network of lenders provides flexibility and choice, making it easier for borrowers to secure favorable loan terms. The platform’s user-friendly interface and comprehensive comparison tools further enhance the borrowing experience, helping users make informed decisions.

  • Access to multiple lenders for better choices
  • Helps borrowers find the best rates and terms
  • User-friendly interface
  • Extensive lender network
Eligibility requirements

As a marketplace, LendingTree’s eligibility requirements vary by lender. Common criteria include:

  • Credit score: Varies by lender, but a minimum score of 620 is generally required
  • Equity: Varies by lender, but many require at least 15% equity in the property
  • Employment: Stable employment history or consistent self-employment income
  • Property: Requirements vary by lender but generally include single-family homes, condos, and townhouses
Repayment details
  • Term lengths: Can be as long as 30 years, depending on the lender.
  • Interest rates: Starting at 6.99% APR
  • Repayment structure: Options include interest-only payments during the draw period and principal plus interest payments during the repayment period
  • Prepayment penalty: Varies by lender, but many offer no prepayment penalties

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. 

HELOCConstruction loan
FundingBased on home equitySpecifically for construction
Interest ratesLower initially, may increase laterFixed rates for the duration
QualificationsEquity in your current homeDetailed plans and timelines
FlexibilityBorrow as neededLimited to construction costs only
Repayment termsLong-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.

  1. 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.

  1. 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.

  1. 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.

  1. 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

Company
Best for…
Rating (0-5)
Best overall
4.9
Credit union
4.7
Marketplace
4.5