People looking for home construction loans are either buying a fixer-upper home and renovating it or building a new home from scratch. FHA home loans are among the best due to their relative leniency. This is so because FHA construction loan requirements include low credit and down payments compared to conventional loans, making it easy for borrowers to get their desired loan amount.
What is an FHA Construction Loan?
The Federal Housing Administration, popularly known as the FHA, is a division of the US Department of Housing and Urban Development, also known as HUD. The FHA created the FHA home loan program to make it easier for consumers to get a mortgage. The FHA construction one-time close is not the most accessible program to qualify for, unlike the standard FHA 203(b). It has some restrictions and limitations compared to any other FHA loan program.
The belief that FHA construction loans do not exist is just a simple misconception that most lending institutions have created in the minds of borrowers due to their hatred for this type of loan. FHA construction loans are also called construction-to-permanent loans, in case you have ever come across such term. An FHA construction loan allows you to close on the mortgage even before breaking the ground. The funds provided with such loans go into an escrow account, with disbursements coming at various stages of the project after due inspection.
A final inspection is usually required before the last disbursement is made. This is to ensure that the home meets all requirements and housing standards set forth by FHA.
General Guidelines
- A minimum middle-FICO score of 620 is required for all applicants. A higher FICO score may be required depending upon the type of property;
- A maximum Loan-to-Value (LTV) of 96.5% based on the total acquisition cost of the land and home;
- The property must be a single-family residence and owner-occupied. Second-home and investment properties are not allowed;
- The loan is made straight to the borrower;
- A twelve-month build time from the date of closing as well as funding;
- The borrower is going to receive a monthly statement for temporary financing based upon the amount of money dispersed thru the draw measure to the builder.
- The land owned by the borrower must be seasoned for 12 months to receive full appraised value. If the borrower held the lot for less than 12 months, the cost of acquisition would be used or the lesser of the appraised value vs. the cost of acquisition;
- A gifted land is allowed, certain restrictions will apply;
- Combining pool construction with home construction is allowed, certain restrictions will apply.
How To Get Construction Loan
FHA 203(K) Loan
There are generally two types of FHA 203k loans – the Streamlined 203k mortgage and the Standard 203k loan, respectively. A streamlined 203k loan, also known as “Limited 203k,” has a more straightforward and quick process and is reserved for homes that require cosmetic repairs like flooring. Homebuyers and homeowners can finance up to $35,000 into their mortgage to repair, improve, or upgrade their homes. The cost of the rehabilitation must be at least $5,000. The other type of 203k loan is the standard 203k loan or “Full 203k loan. This type of loan is meant for properties that require more extensive repairs or renovations, such as foundation and plumbing repairs. The standard or full 203k is not capped at $35,000 and is used if the home is uninhabitable for any reason.
A low-down-payment of 3.5 percent
A minimum credit score of 640
May pay for up to 6 months of mortgage payments
Funding for renovations or repairs of as much as $35,000
Availability of fixed and adjustable rates
Provision of cash for cosmetic maintenance