Everything You Need To Know About Getting an FHA Construction Loan in Texas

If you’re looking to build a new home or renovate an existing property in Texas, an FHA construction loan may be the perfect financing option for you. With an FHA construction loan, you can roll the costs to build or renovate into your mortgage, allowing you to only need one loan instead of separate loans for construction and your permanent mortgage.

In this comprehensive guide we’ll cover everything you need to know about getting an FHA construction loan in Texas including

• What is an FHA construction loan and how does it work?
• Types of FHA construction loans
• FHA construction loan requirements
• The process of getting an FHA construction loan
• Pros and cons of FHA construction loans
• Alternative construction loan options
• Answers to frequently asked questions

Keep reading for all the details on FHA construction loans in Texas so you can determine if this unique type of financing is right for your building or renovation project,

What is an FHA Construction Loan and How Does it Work?

An FHA construction loan is a mortgage insured by the Federal Housing Administration (FHA) that lets you finance the construction of a new home or renovations to an existing property.

With an FHA construction loan, the costs to build or renovate are rolled into one mortgage instead of needing separate loans. You’ll go through one closing process instead of two, which saves time and money on closing costs.

Once construction is completed, the temporary construction financing automatically converts to a permanent FHA mortgage within 60 days.

There are two main types of FHA construction loans available:

FHA Construction-to-Permanent Loan

This loan is used to build a home from the ground up on land you already own. The construction-to-permanent loan finances the construction project and then converts to a permanent FHA mortgage once building is complete.

FHA 203(k) Rehab Loan

The FHA 203(k) program allows you to finance repairs or renovations to an existing home, whether you already live there or are purchasing a fixer-upper. There are two versions of the 203(k) loan:

• Limited 203(k) – For minor renovations up to $35,000

• Standard 203(k) – For major renovations with no capped amount

With both loan types, you get just one mortgage to pay for the home purchase and renovations.

Types of FHA Construction Loans Available in Texas

When getting an FHA construction loan in Texas, you have several options:

FHA Construction-to-Permanent

As mentioned above, this loan combines a short-term construction loan with a permanent FHA mortgage all in one. This is useful when you want to build a home from scratch on land you already own.

FHA 203(k) Rehab Loan

The FHA 203(k) program enables you to finance renovations or repairs to an existing home by rolling the costs into your mortgage. The limited 203(k) is for renovations under $35,000 while the standard 203(k) is for major overhauls.

FHA Streamline 203(k)

This is a simplified version of the 203(k) program that functions like a limited 203(k). It finances renovations up to $35,000 but has reduced paperwork requirements.

One-Time Close Construction Loan

This type of FHA construction loan lets you close once on both the construction financing and permanent mortgage instead of closing twice under traditional construction loans.

FHA Energy Efficient Mortgage

This finances energy efficient improvements in Texas like solar panels, insulation upgrades and new windows. The costs get rolled into your mortgage.

FHA Disaster Relief 203(h) Mortgage

If your home was damaged in a natural disaster, this FHA loan helps you rebuild or buy another home. It offers flexible underwriting and low down payments.

Requirements to Qualify for an FHA Construction Loan in Texas

While FHA construction loans offer flexible qualifying guidelines, you still need to meet certain requirements:

• Credit score – At least 500 for new builds, 580 for renovations

• Down payment – 3.5% of total costs if credit is 580+, 10% if 500-579 credit score

• Debt-to-income ratio – Maximum of 43-50%

• Loan limits – Varies, but $331,760 for single-family homes in Texas

• Cash reserves – Varies by lender, often 3-6 months of mortgage payments

Meeting these requirements makes you eligible for FHA construction financing in Texas. The credit score and down payment rules are more lenient than conventional loans.

The Process of Getting an FHA Construction Loan in Texas

If you want to get an FHA construction loan in Texas, follow these steps:

1. Get pre-qualified and select a lender. Make sure they have construction lending experience.

2. Provide all required documents for underwriting like paystubs, tax returns, bank statements.

3. Choose land if new construction or find a fixer-upper property to renovate.

4. Get the property appraised and select a general contractor if renovating.

5. Have lender review contractor qualifications and get 203(k) consultant if major renovation.

6. Get loan approval once lender verifies info and property meets requirements.

7. Close on the mortgage and start construction. For renovations, money is held in escrow.

8. Get home inspections during building and authorize draws from escrow account to pay contractor.

9. Convert to permanent mortgage within 60 days once new home or renovations are complete.

While the process has more steps than a regular home purchase, an FHA construction loan lets you finance building or renovations all under one mortgage.

Pros and Cons of FHA Construction Loans in Texas

FHA construction loans offer many benefits but also have some drawbacks to weigh:

Pros

• Low down payments of just 3.5-10%

• Lenient credit requirements with scores as low as 500

• Finance renovations under $35K or major overhauls

• One closing instead of two separate loans

• Interest rates are competitive with conventional loans

Cons

• Must pay mortgage insurance premiums (MIP)

• More paperwork and underwriting steps

• Limitations on what renovations can be financed

• Must use licensed contractor for all work

• Stricter property requirements than conventional loans

For many homebuyers and homeowners, the pros outweigh the cons for Texas FHA construction loans.

Alternatives to FHA Construction Loans in Texas

While FHA construction loans are a top choice, here are a few alternatives:

Conventional Construction Loans

Banks and credit unions often offer construction loans and permanent mortgages. Requirements are stricter but interest rates may be lower.

VA Construction Loans

Veterans may qualify for VA construction loans with 100% financing and easier approval.

USDA Construction Loans

For low-income borrowers in rural areas, USDA construction loans offer 100% financing and lower rates.

203(k) Renovation Mortgages

Fannie Mae HomeStyle and Freddie Mac CHOICERenovation loans work similarly to FHA 203(k) loans.

HECM Reverse Mortgages

Seniors can tap home equity for renovations with an FHA-insured HECM reverse mortgage.

Shopping around for the best construction loan or renovation mortgage for your needs is advised.

Frequently Asked Questions About FHA Construction Loans in Texas

Here are answers to some common questions about getting FHA construction financing in Texas:

What credit score is needed for an FHA construction loan in Texas?

The minimum is 500 but you’ll need 10% down with scores 500-579. With at least 580, you can qualify with just 3.5% down.

How much money can I borrow with an FHA construction loan?

There are FHA mortgage limits that vary by county in Texas. But for a single-family home, the max is $331,760.

What renovations are allowed for Texas FHA 203(k) loans?

Any repairs or renovations that maintain or improve the property are eligible, such as roofing, plumbing, flooring, HVAC, additions, and more. Luxury upgrades are restricted.

Can I get an FHA construction loan for a manufactured home in Texas?

Yes, FHA construction loans can be used to build a manufactured or modular home. You’ll need to own the land first.

How long does it take to get approved for an FHA construction loan?

Approval can take anywhere from 2 weeks to a month once you provide all required documents to your lender. The entire construction process usually takes 6-12 months.

What are the rates on FHA construction loans in Texas?

Rates vary by lender but are competitive with conventional construction loans. FHA construction rates