Anyone looking for a loan to build a new home will find numerous options on the open market. These loans are available through commercial lenders and mortgage brokers, but they can often be difficult to acquire or overly complicated in scope and terms.
There are numerous options when you need financing for the construction of a new home, but few are as beneficial as FHA construction loans. If you are struggling to qualify for a construction loan, or if you simply want to explore all of your options, you should look at these useful financing tools.
These loans allow financing on a short-term construction loan that can then be rolled into a long-term permanent loan once the construction is complete. It has a single closing, which happens when the loan is secured (before construction), reducing the total fees you have to pay. On the short term, you have a loan that supports the financing of the construction itself, while the longer portion looks more like a typical FHA loan.
The low downpayment requirement is often the biggest motivator for using an FHA construction loan. With this form of financing, you can get a single loan that needs only a 3.5% downpayment. Yes, this can be a significant amount, equal to $3,500 for every $100,000 borrowed, but it is far less than the 5%, 10%, or even 20% that may be required from other options.
There is also an easier qualification process. If you have a decent credit score (620 or higher will substantially increase your chances of approval), you are more likely to be qualified for the loan.
A key advantage to using an FHA construction loan is the fact that it is a one-time close. With other options, you will have to secure the first loan and close on this financing. Then construction will start, and once it is complete, you will have to secure a new loan, meaning you have to go through the entire process all over again, costing precious time and money. Essentially, this can double the closing costs while adding a lot of hassle to the process.
With an FHA construction loan, you only go through the financing process once. After the completion of construction, there will be a thorough inspection on the property, ensuring the new home meets specific requirements for the area. After inspections, the city or county will provide approval to occupy the residence. After approval, the loan will be converted into a long-term, permanent loan.
Easy, or at least simplified, approval is one of the top advantages for using an FHA construction loan. By simply following these basic steps, most borrowers will be able to secure financing for their home’s construction.
First of all, you will need to verify that you are eligible for an FHA loan. The Federal Housing Administration is a government organization dedicated to increasing homeownership, so they make access to lending easier. However, you will still need to meet their basic requirements for credit, income, and assets. If you do not meet the basic guidelines set by the FHA, there is little point in proceeding with the loan itself. Fortunately, getting approved for an FHA construction loan is quite simple, and the requirements are less strict than many other options; as long as you are organized with your documents, your chances of approval are high.
Next, you will need to select the builder. To do so, take a look at projects builders have completed in the past, learn about their business history, as well as what types of projects they have completed in the past. Remember that you will be working directly with this person for roughly 6 months to a full year, so having good communication throughout the process is essential.
When you have a builder selected, they will need to be approved by the lender. Not only will you need to be approved as a borrower, but the team completing the construction will also need to be verified by the lender. The builder will need to complete a detailed approval process, which will involve a variety of information and documentation. They will need references, tax returns, profit-loss statements, proof of licensing (when applicable), and a scope of other information to be approved.
Once you and your builder have been approved, you can move forward with site selection. (You will, after all, need a place to build your house!) If you already own the land, you are a step ahead, but one of the benefits for FHA construction loans is that you can purchase land and build the home with a single loan, greatly simplifying the process.
Now that you have a site for your home, it’s time to create a project design and estimate for the cost of construction. This estimate will take into account the costs of the project from start to finish; from digging the basement to nailing the final shingle. Once you have the final numbers, the lender will review them and, assuming everything meets their requirements, create final approval for the loan.
Construction can then proceed, and before too long you will have a wonderful place to call your own.
The FHA has limits on how much you can borrower, and these limits are determined on a county-by-county basis.
In most projects, there are changes to the material or modifications to the overall design; these changes will have a direct impact on the price of the project, usually driving up the costs. For this reason, there is a construction contingency built into the loan. This contingency will cover overages in the construction costs, and it’s usually equal to roughly 5% of the estimated costs.
By working with an experienced lending agent, you can get the best possible financing for your home construction. From land purchases to the construction of a large home, we can help with approval and processing of your loan.
Contact our staff today to learn more!
“Chad Baker is THE BEST, most professional, understanding, HONEST person I’ve ever worked in the mortgage industry. He knows exactly what he’s talking about, will never promise something he can’t deliver, and will bend over backwards to get you what you need. I had a very unique problem qualifying and every other mortgage company I worked with assured me from the beginning that they could get me financed, and then it would all fall apart once we hit underwriting. Chad understood my circumstance from the beginning and patiently explained every step of the way. I can’t thank you enough Chad! Juliann has been great keeping me updated and making sure that everything comes together in a timely fashion. She also appreciates my sense of humor, which gives personality to a boring funding process. Thanks Juliann! I HIGHLY recommend Home Point and if I ever buy another home, will absolutely use them again.”
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“Chad and his team were fantastic. They were incredibly responsive to us and our needs. Chad laid out several refinance options for us, and was very supportive when we decided on the option we felt was best for our family. Chad and his team worked our deal and got our mortgage funded incredibly fast, with excellent service and even took the time to thank us personally once we funded. I can’t recommend Chad enough!”
I hope you enjoyed reading this article. It’s my goal to keep you updated with the latest real estate mortgage news. I’m proud to provide you with 100% original and unique content. Subscribe now to get high quality real estate mortgage content and articles delivered directly to your inbox. Chad Baker is Regional Manager for LendUS. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2017. Got a question for Chad? Call (858) 353-8331 or submit your question online