Do you hope to build your own home from the ground up? But maybe you think that’s not possible because your credit score isn’t high enough to get a standard mortgage? Or perhaps you don’t have a large amount of cash in reserves for a down payment. Many people in this situation find out they can still build the home they dream of, thanks to FHA Construction Loans. In this article, we’ll help you understand how to get an FHA construction loan, and determine whether these loans are right for you.
What Is The FHA Construction Loan Program?
FHA construction loans are offered by the U.S. Federal Housing Administration, and administered through lenders all over the country. The main attraction of these loans is they only require 10% down, in contrast to regular loans which require 20-30% cash down payments. The loan is really a specialized program that helps homebuyers finance the construction of a new home or rehabilitate an existing property. This special type of loan is more flexible and offers favorable terms. FHA Construction loans can be a great option for those who aren’t eligible for a typical loan.
How FHA Construction Loans Work
FHA Construction Loans follow a unique process that differs from traditional mortgage loans. A regular home mortgage loan does not cover any rehab costs or construction. However, FHA loans offer a one-year term and cover the design and build stages of constructing a home. Afterward, the loan is sometimes converted to a regular mortgage loan. Buyers have the advantage of only one loan to address two different stages.
Two Types of FHA Construction Loans
Construction to Permanent Loan
The FHA Construction-to-Permanent Loan features an initial loan to cover the construction phase. When the home is completed, the loan converts to a permanent mortgage loan. The purpose of this is to make it an easy process, so you don’t have to get two separate loans. Buyers also have simpler terms and less paperwork when they take advantage of one loan this way. What’s more is these loans also eliminate closing costs, which can save 3-6% of the price of the house.
FHA 203(k) Loan
The FHA 203(k) program allows buyers to borrow money to make repairs or do complete renovations on a home. It gives buyers an excellent opportunity to customize a property along with benefits of an FHA-insured mortgage. The repairs must be a minimum of $5000 to apply for this type of loan. Under the FHA 203(k) program, there are two options:
Limited 203(k) loans: If your renovations will amount to less than $35,000, then you can remodel a residential property of up to four units.
Standard 203(k) loans: If you find a fixer upper that needs a complete overhaul, this is the loan you will opt for. Taking out a standard 203(k) loan requires that you use a licensed 203(k) consultant to assist you. These consultants ensure your project will meet the necessary requirements of the loan. To find out if a 203(k) consultant is licensed with the Department of Housing and Urban Development, check their credentials on the HUD website.
How to Qualify For an FHA Construction Loan
To qualify for an HUD FHA Construction Loan, you must meet these criteria:
- First, your FICO score must be at least 580. As one exception, if you are able to put down 10 percent, your score can be as low as 500.
- Second, you must have reliable income. Your DTI (debt to income) ratio must be 43%. To find out if you meet this criteria, add the total mortgage payment for your home plus all your monthly expenses. Now divide that total by your gross monthly income. If that number is under 43%, you meet the DTI ratio requirement.
- Third, you must be able to pay 3.5 percent down on the property. Note that the exception to this is if your credit score is below 580. In that case, you must pay 10 percent down up front.
- Something further to keep in mind is the amount you borrow can not be above the FHA loan limits.
For a standard 203(k) loan, you have to prove you are working with a licensed 203(k) consultant to guide you in the process. This consultant will help you submit your building or renovation plans for review and approval. They can also help you design your home so that it meets all inspections.
Apply For The Loan
If you meet the criteria, next step toward applying is to search for an FHA lender in your area. Although the U.S. government oversees the loan program, they do not loan the money. The money is lent through different banks that work with the HUD on these loan programs. And different lenders will offer different rates and terms so it’s wise to shop around and compare offers.
FHA Construction Loans: A Unique Opportunity
FHA Construction Loans are a unique opportunity for individuals who want to build or renovate a home. However, understanding the intricacies of these loans and is crucial to success. Whether you opt for a construction-to-permanent loan or leverage the FHA 203(k) program, these options can help turn your housing dreams into reality. Now that you know how to get an FHA Construction loan, you are ready to embark on your own successful home renovation or building journey.
