If having your own home built from the ground up is a dream of yours, but you don’t quite have the finances or the borrowing capabilities to make it happen, an FHA construction loan may be the perfect loan for you.
Following the mortgage problems of 2008, many lenders could not justify offering these types of loans as their institution struggled to recover. However, as the situation has continued to improve, many lenders are once again making these construction loans available to qualified borrowers.
An applicant with higher credit scores scores will likely have the best success in finding a lender ready to offer a construction loan.
What Are FHA Construction Loans?
A mortgage insured by the Federal Housing Administration is known as an FHA loan.
The loans are issued by traditional lenders, but backed by the government. If you are interested in this type of loan, be aware that the types of loans may vary from lender to lender.
Make sure you understand the different options that are available, and choose the one best suited to your individual needs and circumstances.
Some lenders may offer only a standard FHA loan, which includes the more typical two closing dates.
One closing date would occur before the construction process begins, and the other after the home is built.
This option is sometimes stressful and more complicated for everyone involved as financial circumstances can change a lot during construction.
A situation like the loss of a job could stall the process of completing the mortgage, and result in a newly built home sitting empty while details are sorted out.
Even if everything goes smoothly, having to go through the process twice doubles the time as well as the fees.
How much does it cost to build a house
FHA One Time Close Construction Loan
For many, a much better option is the FHA One Time Close Construction Loan, also known as a Construction-to-Permanent Loan, which features only one application and one closing date.
These loans are available for those who wish to build a home on site, known as stick-built homes. Some lenders, not all, will also offer loans for modular homes, or new manufactured housing, with the exception of single wide models.
Borrowers can put all costs into one single closing, including closing costs, the cost of construction, purchase of the lot when needed, and the mortgage. Guidelines and a plan for the life of the loan at all stages will be developed.
An escrow account will be established to handle construction expenses and other fees during the building period.
Homeowners will not begin mortgage payments until an established time after construction has been completed and all inspections have taken place.
What Are the Requirements To Get an FHA Loan?
- A FICO score of at least 580 will require you to make a down payment of 3.5%
- FICO scores of 500-579 require a 10% down payment
- Mortgage insurance premiums must be paid until debt is paid down to an established percent of your home’s value
- You must have a debt to income ratio less than 43%
- The new home must be your primary residence
- You must have a steady income
- You must provide proof of employment
Steps to Complete Your FHA Loan
1. Do your homework and choose the construction loan option that best suits your needs.
2. Make sure you are qualified and complete the approval process.
3. Select your builder and have the builder go through the approval process.
4. Choose the site of construction.
5. Work out details with the builder on all costs.
6. Lender approves project and works out details of loan.
7. Complete your closing paperwork, pay down payments and fees.
8. Construction will begin.
9. Home is complete and inspections have taken place.
10. You move into your fantastic new home, and mortgage payments begin.
Pros of FHA Loans
- More Lenient Qualifications- Even those with lower credit scores, credit problems, or no established credit may qualify
- Lower Interest Rates- FHA rates make payments affordable as rates are locked in from the start and there are no surprises after the home is complete
- Reduced Fees- Borrowers are not faced with enormous extra costs
- Lower Down Payments- Those with good credit scores enjoy the best benefits
- Bankruptcy and Foreclosure Applicants Not Excluded- Efforts to fix credit mistakes and reliable payment history give you a chance to qualify
- No Bank Balance Requirements- Borrowers are not given a minimum
- One Consolidated Loan Option- Many people are attracted to the convenience and certainty that comes with this choice
- Your Home Built For You- This is perhaps the greatest pro of all as the loans provide an opportunity for many people to have their own personalized home, an opportunity they may not otherwise have
- Ease of Process- FHA loan processes have been streamlined to operate smoothly and efficiently
Cons of FHA Loans
- Finding a Builder– Builders must be approved by the lender, a process that can take a few weeks. The builder must also be someone who can turn your vision of a dream home into a reality, so depending on your area, and the number of qualified builders available, the process of finding the perfect builder can be lengthy.
- Finding a Lot– While this may not be an issue for some, if you do not already own a piece of land to build on, you are faced with the task of finding a site for construction of your new home. You should also be aware that FHA only considers the value of the land itself, and does not assign any value to structures that may already be present on the lot.
- Mortgage Insurance Premiums– You will have to figure the cost of the premiums into your closing costs.
Sometimes the opportunity to have your own home built just the way you want it, in just the right spot, by just the right person seems like an impossible task.
However, as you can see, FHA construction loans provide an opportunity for you to make the dream of building your own home come true.
Are you ready to apply for an FHA construction loan?