Constructing the home of your dreams is a thrilling achievement but it does require financial consideration. One way to make the process easier is with an OTC construction loan, which bundles the construction costs and the mortgage into a single loan. Compared to a typical construction loan which may require two different closing dates, the loan’s one closing means a shorter closing process and less paperwork at the aside.

Borrowers considering OTC loans for construction should note that the down payment is one of the biggest factors in trying to figure out which approach may work best. How much do you need? What options are available? Is there a way to lower your upfront costs? In the following article, we’ll take you through the ins and outs of down payment rules and options for One-Time Close Construction Loans.

Understanding the One-Time Close Construction Loan

A Single Close Construction Loan combines the construction lending and the permanent mortgage into one package. This loan insulates borrowers from increases in interest rates during the construction period because the rate is locked before closing. It is accessible in a variety of loan programs, including:

• Conventional OTC Loans
• FHA OTC Loans
• VA OTC Loans (for eligible veterans and service members)
• USDA OTC Loans (for rural areas)

Each program has its own rules about how large a down payment you must make, which is why it’s important to find out what options you have.

Why the Down Payment Matters

The down payment is the initial cash you pay towards the total loan. For a construction loan, this money covers the risk the lender takes on your home while it is under construction. Because lenders are paying for a home that does not yet exist, they want to make sure you have skin in the game financially.

Your down payment directly affects:

1. Loan Qualification – Larger upsets can help you qualify for a loan.
2. Monthly Payment – Bigger down payments means lower loan amount and lower monthly payments.
3. Interest Rates – Good equity also secures more favorable interest rates.
4. Private Mortgage Insurance (PMI) – A 20% down payment (in most cases) will allow you to avoid PMI.

Standard Down Payment Requirements by Loan Type

1. Conventional One-Time Close Loans

Traditional OTC loans would typically require 10% to 20% down. The specific amount will be based on your credit profile, lender and the cost of the project. Borrowers with strong credit and financials may access lending at the lower end of this range.

• Minimum Down Payment: 10%
• Best for: Borrowers with strong credit and stable income

2. FHA One-Time Close Loans

FHA OTC loans are less restrictive, which appeals to new property owners or slightly lower credit scorers. FHA only requires a 3.5% down payment if your credit score is 580. If that number is too low, and if the lender follows the Lending Tree study’s model, you will need to pay 10%.

• Minimum Down Payment: 3.5%
• Best for: Buyers with limited savings or lower credit

3. VA One-Time Close Loans

The VA OTC Loan is one of the most potent loan options available for qualified veterans, active-duty service members, and surviving spouses. These loans do not generally require any money down and provide 100% financing. That’s so veterans can build a home without having to worry about a large upfront expense.

• Minimum Down Payment: 0%
• Best for: Military borrowers

4. USDA One-Time Close Loans

The USDA OTC Loan is intended for rural properties (though you might also be surprised by how many American cities qualify) and, like a VA loan, usually doesn’t require a down payment. There are income eligibility requirements to qualify for a home loan with a USDA loan, and the home must be located in an eligible area.

• Minimum Down Payment: 0%
• Best for: Rural homebuyers with limited cash reserves

Down Payment Options: Where Can It Come From?

Now that you know what’s required most of the time, consider your options for funding the down payment. Many borrowers are shocked to hear that down payments don’t necessarily need to have come directly from a borrower’s own savings.

1. Personal Savings

The most popular place to get a down payment is your own savings. By accumulating a savings account especially for your construction project, you are given the flexibility to not need to go in debt.

2. Gift Funds

A lot of mortgage programs, such as those offered by the FHA and the conventional options, allow gift funds from family members, $1,414 for the average first-time buyer, for your down payment. Lenders might ask for a letter verifying that the money is a gift and not a loan.

3. Retirement Accounts

Borrowers occasionally raid their 401(k) or IRA accounts to use for down payments. Some plans let you take loans against your retirement account balance. But you’d want to consider tax implications and long-term implications before going that route.

4. Equity in Land

Otherwise, if the appraised value of your land is high enough, you can sometimes use your land as a down payment. So, if the value of your land is $40,000, and the project total is $300,000, the land equity you have can be used as a down payment (in part or in full) to help determine the maximum amount you’re qualified for.

5. Down Payment Assistance Programs

Local and state housing agencies in some areas offer grants or forgivable loans to help cover down payments. These are usually for first time buyers or people with low to moderate incomes.

How Much Should You Put Down?

Even if your loan type enables you to make little or no down payment, it may be worth it to put down more if you can. Here’s why:

• Lower Interest Costs – More equity often equals lower rates.
• Smaller Monthly Payments – Less borrowed means easier long-term affordability.
• Avoid PMI – Conventional borrowers who put down at least 20% can skip PMI costs.
• Instant Equity – A larger down payment means you start homeownership with built-in equity.

However, if making a larger down payment causes you to be cash poor, you should drop closer to the minimum and keep some cash on hand for the unexpected expenses that crop up during construction.

Challenges with Down Payments in Construction Loans

While down payments on traditional mortgages are usually fairly simple, construction loan down payments can be way more complex:

1. Appraisal Gaps – The appraised value of the home that is complete could be lower than the cost the builder wants for it. Should that appraisal happen to come in low, you may be asked to pony up an even larger down payment.
2. Builder Requirements – Some builders require a down payment in advance that is not included in the loan down payment.
3. Change in Project Costs – You may have budgeted a specific amount for your project, however a construction project never runs to plan and you could be required to inject more funds with the builder than the initial installment you paid for your deposit.

Tips for Preparing Your Down Payment

If you’re going to be applying for a One-Time Close Construction Loan, here are some things you can do to prepare:

• Start Saving Early – Open a dedicated savings account to track progress.
• Check Loan Program Eligibility – See if you qualify for VA or USDA programs with no down payment.
• Leverage Land Equity – If you own land, get an appraisal to use it toward your down payment.
• Explore Assistance Programs – Research state and local programs for help.
• Keep Reserves – Don’t put every dollar into the down payment. Hold back emergency funds.

Final Thoughts

Down payment choices for One-Time Close Construction loans are less discriminatory than ever, but the construction loan/land must meet the FHA standards or better. VA and USDA loans might also allow you to skip the down payment altogether, while FHA loans can permit as little as 3.5%. Conventional loans typically require more, but can be used on more types of properties.

The ideal option for you is based on your financial situation, qualifications and long-term goals. Whether you’ve saved, utilized land equity, or you have a family member making a gift, when it comes to building a new home the better prepared you are, the less stressful the process will be.

All that stands between you and breaking ground on your dream home is the right strategy to keep both your upfront costs reasonable and your financial future on solid ground, too.