The down payment question is one of the first things borrowers ask — and one of the most misunderstood. Most people assume construction loans require 20% down because that's what they've heard from banks. The reality is more nuanced, and for primary residence builds in Arizona, you may need significantly less than you think.
This guide covers exactly how down payment works on an Arizona construction loan: what the minimums are, how land equity factors in, what counts as acceptable funds, and how to calculate your total cash to close — which is different from your down payment alone.
What Different Lenders Require
Down payment requirements vary significantly depending on the type of lender and the loan program. Here's how the landscape breaks down in Arizona:
| Lender Type | Primary Residence | Notes |
|---|---|---|
| Liberty Federal CU (this program) | 5% minimum | Single-close C2P, up to $3M, rate locked before groundbreak |
| Most credit unions | 10–15% | Varies by institution; many have pulled back from construction lending |
| Regional banks | 15–20% | Often two-close structure; rate not locked until permanent conversion |
| National banks | 20–25% | Many have exited construction lending entirely post-2020 |
| Hard money / private lenders | 25–35% | Higher rates (10–14%), short terms; typically for investors |
The 5% minimum on our construction-to-permanent program is one of the most competitive down payment requirements available in Arizona for a conventional construction loan. It applies to primary residences with loan amounts up to $3 million.
How Down Payment Is Calculated on a Construction Loan
On a standard purchase mortgage, the down payment is simple: it's the difference between the purchase price and the loan amount. Construction loans are more complex because the "value" of the project is determined by an appraisal of the completed home — not the sum of your land cost plus construction contract.
Here's how the math works:
The loan is based on the lesser of the total project cost or the as-completed appraised value. In the example above, the project costs $600,000 but appraises at $650,000. The loan is based on $600,000 (the lesser figure), so 5% down = $30,000.
If the appraisal came in below the project cost — say $580,000 — the loan would be based on $580,000, meaning you'd need to cover the $20,000 gap out of pocket in addition to the 5% down payment.
Does Land Equity Count as a Down Payment?
Yes — and this is one of the most valuable aspects of construction loan financing for borrowers who already own their lot.
If you own the land free and clear, its appraised value is counted as equity in the project. In many cases, land equity alone satisfies the entire down payment requirement. Using the example above: if you own the $120,000 lot outright, that equity represents 20% of the $600,000 project cost — well above the 5% minimum. You would owe nothing additional at closing beyond closing costs.
If you have an outstanding lot loan balance, only the equity above that balance counts. So if the lot is worth $120,000 and you owe $60,000 on a lot loan, you have $60,000 in usable equity — which in the example above would cover the 5% minimum ($30,000) with room to spare.
Important: The land value used in the calculation is the lender's appraised value, not what you paid for it. If you bought the lot years ago at a discount and it has appreciated, that increased value works in your favor. If you overpaid for the lot, the appraisal may come in lower than your purchase price.
What Counts as Acceptable Down Payment Funds
Construction loans follow similar guidelines to conventional mortgages when it comes to acceptable fund sources. The lender will verify the source of your down payment funds during underwriting.
What Does Not Count as a Down Payment
A few common assumptions that do not hold up in underwriting:
Down Payment vs. Total Cash to Close
This distinction trips up a lot of first-time construction loan borrowers. Your down payment is the equity contribution — 5% of the project cost in our program. But your total cash to close is higher because it also includes:
Closing costs on a construction loan are typically slightly higher than a standard purchase mortgage because there are additional fees: construction administration, draw inspection fees, and sometimes a construction loan origination fee. Budget for 1.5–2.5% of the loan amount in closing costs.
Reserves are funds you must have available after closing — not funds you spend at closing. The lender wants to see that you have 2–6 months of projected mortgage payments in liquid assets after all closing funds are paid. These reserves stay in your account; they are a qualification requirement, not an additional cost.
Down Payment for Investment Properties and Second Homes
The 5% minimum applies to primary residences only. If you are building an investment property or a second home in Arizona, expect higher requirements. Investment properties typically require 20–25% down, and second homes generally require 10–15%. The higher requirements reflect the increased risk profile — borrowers are more likely to default on a non-primary property during financial stress. If you are building a custom home that will be your primary residence, the 5% program is available regardless of the loan amount, up to $3 million.
Frequently Asked Questions
How much down payment is required for a construction loan in Arizona?
It depends on the lender and property type. Most banks require 10–20% down. Our construction-to-permanent program at Liberty Federal Credit Union allows as little as 5% down on a primary residence. Investment properties and second homes typically require 20–25%.
Does land equity count as a down payment on a construction loan?
Yes, in most cases. If you already own the lot free and clear, its appraised value can be applied toward your down payment and equity requirement. If you have a lot loan with an outstanding balance, the equity above that balance may count. Your lender will order an appraisal to determine the land's current value.
Can gift funds be used for a construction loan down payment in Arizona?
Yes, gift funds from a family member are generally acceptable for primary residence construction loans, following the same guidelines as conventional purchase mortgages. The gift must be documented with a gift letter stating no repayment is required.
What is the difference between down payment and cash to close on a construction loan?
Down payment is the equity contribution toward the project cost. Cash to close includes the down payment plus closing costs (typically 1.5–2.5% of the loan amount), prepaid interest, appraisal fees, and any required reserves. Your total cash to close will be higher than your down payment alone.
Do I pay the down payment at closing or during construction?
The down payment is paid at closing — before construction begins. The lender then funds draws to your builder throughout construction. You do not make additional equity contributions during the build unless there are cost overruns that exceed your loan amount.
5% Down. Up to $3M. Rate Locked Before Groundbreak.
Talk to Matthew Siket at Liberty Federal Credit Union about your Arizona construction project. We'll review your land equity, project budget, and qualification profile — no obligation.
Matthew Siket · NMLS #409914 · Liberty Federal Credit Union · NMLS #518186