5 Best Custom Home Construction Loans in Tucson

5 Best Custom Home Construction Loans in Tucson

  • In Arizona, construction loans are short-term loans with higher interest rates that usually last for a year to 18 months. Upon completion of construction, the construction loan converts to a traditional mortgage. Borrowers must provide a downpayment or collateral to secure the loan.
  • Arizona is attracting retirees who want sunny weather and affordable homes for their dream retirement. The latest U.S. Census data reveals that Tucson’s population has grown by almost 12% in the last ten years.
  • More people moving into the area has had an impact on the local housing market. This is evident in the rising house prices and the decreasing availability of homes. According to the Tucson Association of Realtors, the average home price in Tucson is $477,200 in 2022. However, new listings have decreased by 6.29%.
  • Loans for construction costs projects operate differently compared to conventional borrower home loans or even refinancing. Arizona banks, credit unions, and mortgage companies have experts who can guide you through the construction loan process.

Qualifying For a New Construction Loan

In a competitive real estate market, discovering a house that precisely meets your needs is a marvel. Concurrently, securing the funds and assembling the crew required to construct a new home seems overwhelming. That’s where a new custom home construction loan comes in. More restrictions exist for this type of loan however.

  1. Lenders need a licensed and insured residential contractor with a bond and warranty to build your home. You should already have a builder lined up to work with on your project before you apply for financing.
  2. You must have a higher credit score than a traditional mortgage to qualify for a construction loan. Lenders typically require a credit score of 680 or higher to approve a loan. However, there are some lenders who prefer a credit score of 720 or above.
  3. Lenders typically require a debt-to-income (DTI) ratio of no higher than 45%. Pay down debt, get debt-to-income as low as possible and make sure there are no errors on your report.
  4. Income verification requirements. Lenders need proof that you can repay the loan, so you must give them financial verification documents. This will consist of at least two years tax returns and a review of your work history.
  5. Higher down payment requirements. Lenders usually require borrowers to pay 20-30% of the construction project’s costs as a down payment.
  6. Require a detailed plan for your construction project. Lenders like to see that the borrower has carefully planned out their construction project before borrowing funds. Many financial institutions offering construction loans will want to see completed plans and specifications of the house.
  7. Require an upfront appraisal based on area comps and future value. Banks require your building plans before granting a loan. They will only lend a portion of the total value.

What Does a New Build Loan Pay For?

If you own your land then many banks will consider it as part of the collateral needed to underwrite your loan. If you don’t own the land, you will usually have to pay 20% to 30% of the total building cost. Additionally, you must provide evidence of having sufficient funds. Construction loans cover the cost of:

  • The land or lot
  • Civil engineering and lot preparation
  • Licenses and charges
  • Workforce and supplies
  • Settlement expenses

Certain loan providers may bear extra expenses. 

The home’s value after the construction determines the loan amount. Building your own home can give you a significant advantage by creating up to 24% positive equity. Banks will base the final estimated value on comparable houses in the area.

Requirements For a Construction Loan

Typical construction loan terms could be:

  • Must be primary residence
  • Single-time settlement. Pay the closing fee only once
  • Secure your rate in advance to evade the risk of interest rate fluctuations
  • Options include FHA, VA, and Conventional
  • Zero percent down payment up to $822,375 (Exclusive to VA)
  • 3.5% down up to FHA county limits ($356,362-822,375) 
  • Down payment of 20-30% (less if you own the land)
  • FICO 680+ preferred 720
  • Building site limited to 10-acres maximum
  • Only stick-built and modular homes permitted
  • Log homes or metal homes (barndominium) are not allowed
  • Self-build or owner builder homes are not permitted.
  • ADUs (Accessory Dwelling Units – such as Granny Flats/Garage Conversions/Basements) are not permitted

There are numerous loan programs on offer, each having its own loan procedure, credit approval criteria, and interest rates.

Custom Home Construction Lenders to Consider in Arizona:

1. US Bank

US Bank is a big lender that offers a strong loan option for building projects. They don’t give loans for homes built by owners, investment properties, or manufactured homes.

  • A minimum credit score of 720 is needed
  • A 10% down payment for up to $750,000
  • A 20% down payment for up to $1.5 million
  • A 25% down payment for up to $2 million
  • Loans of up to $10 million can be provided
  • Only primary residences and second homes are eligible
  • The purchase of a lot can be used as a down payment
  • Loans for major renovations are accessible
  • Build periods of 12-24 months are offered
  • 30-year fixed One-Time-Close or Adjustable Rate Mortgage (5/1, 7/1 & 10/1) are available
  • A one-time closing that automatically transitions to permanent financing after construction
  • Payments are interest-only during the construction phase
  • No penalties for early repayment
  • Speculative or Investment Builds are not allowed
  • No Pre Starts are permitted

2. NewAmerican Funding

NewAmerican Funding is a national lender offering a streamlined construction loan process.

  • Easier application: Saves time by filling out one form instead of two for construction loans.
  • Interest-Only payments: You can make interest-only payments while building your home with One-Time Close Construction loans.
  • Lock in a fixed interest rate: When a One-Time Close Construction loan, you have the choice to opt for fixed-rate mortgages.

3. Washington Federal Bank

Washington Federal Bank provides a construction loan service in Arizona that homeowners have described as a straightforward process. Start the loan application process at WaFd.

  • Washington Federal retains your loan, classifying it as a portfolio product.
  • They confidently believe that their rates are competitive and people should compare them with other lenders.
  • They offer an online application procedure to initiate the process.

4. Arizona Federal Credit Union

Credit unions often have more favorable underwriting requirements for members. Arizona Federal Credit Union is a top choice in Southern Arizona.

  • Single-time closure
  • Flexible rate loans featuring an initial fixed rate duration of up to a decade.
  • Approval for decision-making and fund disbursement at a regional level.
  • Get a loan to renovate or demolish a property and build a new structure in its place.

5. Arizona National Bank

National Bank of Arizona offers an online process to help you save money on closing costs for a new house loan. This loan is available for both primary and secondary homes.

  • Single-time closure
  • Loan values reaching $5,000,000
  • Interest rate secured before closure
  • Construction duration of up to 24 months
  • Provision of adjustable rate mortgages
  • Applicable for renovation tasks

Is a Home Building Loan a Good Idea For You?

To conclude, construction loans in Arizona typically carry a higher interest rate compared to traditional mortgages. This is because there is not enough collateral for the construction loan. They are still building the home, which is a significant component of the collateral. However, the construction phase requires payment of only the interest.

How much are the payments on a construction loan?

Learn more with our Construction Loan Calculator.

Two main categories of construction loans exist — construction to permanent loans and single close loans. Borrowers must pay off the construction loan with construction to permanent loans once they complete the house. Typically, people do this with a regular mortgage.

Once you complete the house, single close construction loans transition into a regular mortgage. This eliminates the need to qualify for a new mortgage.

Find a Construction Loan Specialist in Tucson, AZ

Chris Wilkes Residential Mortgage Lender Headshot
Chris Wilkes

Residential Mortgage Lender | NMLS ID: 818937

First Time Homebuyer
Adjustable rate
Conventional Loans
Jumbo Loans $5,000,000+
Investment Property Financing
Primary and Secondary Residence Financing
Luxury Home and Condominium Financing
Fixed rate
One-Time Close Construction Loan

We are not lenders. This is not professional financial advice. Consult a financial advisor, licensed lender or loan officer about your particular circumstances

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