Everything You Need to Know About Fannie Mae Construction Loans

Building your new home becomes simple with the right lender. Avoid challenging expenses and timelines by securing financing that will make building a home achievable and affordable.

A Fannie Mae single close construction loan puts building a single-family home within your reach, offering down payment options and simplified financing.

Purchase land or build on property you already own with a single loan for both the construction and long-term mortgage of your new home.

Construction loans allow homebuyers to finance the building of a new home or make major renovations to an existing property. Fannie Mae offers two types of construction loan programs – single-close construction loans and two-close construction loans. As one of the largest sources of home mortgage financing in the U.S., Fannie Mae construction loans can be a great option for borrowers looking to build their dream home.

In this comprehensive guide we’ll cover everything you need to know about Fannie Mae construction loans including

What is a Fannie Mae Construction Loan?

A Fannie Mae construction loan is a mortgage loan product offered by Fannie Mae that provides financing to construct a new home or make major renovations. Fannie Mae offers both single-close and two-close construction loans.

With a single-close loan, the construction loan and permanent mortgage loan are rolled into one loan closing. This means you only go through one loan application and closing process

With a two-close loan, you get separate construction financing and then later convert it into permanent financing once construction is complete. This involves two separate loan applications and closings.

Types of Fannie Mae Construction Loans

Single-Close Construction Loans

The benefits of Fannie Mae’s single-close construction loan program include:

One closing: Only one set of loan documents and one closing. Streamlined process.
Lock in your rate: You can lock in your interest rate upfront for the permanent mortgage.
Convert to permanent loan: Construction loan automatically converts to permanent loan after construction.
Customizable: Build a customized home. Fannie Mae allows for site-built, modular, and manufactured homes.
ADUs allowed: You can finance an accessory dwelling unit (ADU) with your construction loan.

Two-Close Construction Loans

With a two-close Fannie Mae construction loan, you get short-term financing for construction and later apply for permanent financing. Benefits include:

Shop for construction financing: You can find the best rates and terms on just the construction loan.
Already started construction: If you already have construction financing, you can get a Fannie Mae loan for the permanent mortgage once construction is done.
Rate not locked initially: Your permanent loan rate isn’t locked in until construction nears completion. Can take advantage of drops in rates.
Two application processes: Downside is going through two separate application and closing processes.

Fannie Mae Construction Loan Requirements

To qualify for a Fannie Mae construction loan, you’ll need to meet certain requirements:

Credit score: Minimum 620 credit score. The higher your score, the better rate you can get.
Down payment: Typically 10-20% down payment required. Can be as low as 3% with additional mortgage insurance.
Debt-to-income ratio: Your total monthly debt payments, including the future mortgage payment, should not exceed 45% of your gross monthly income.
Loan-to-value ratio: The loan amount cannot exceed a certain percentage of the home’s appraised value. This helps ensure you have enough equity.
Construction documents: You’ll need to provide plans, specs, and details on the builder.
Contingency reserves: Expect to have 12+ months of mortgage payments in reserves to cover any construction delays or cost overruns.

The Construction Loan Process

Here is an overview of the typical Fannie Mae construction loan process:

Apply and get pre-approved: Work with a lender to apply and get pre-approved based on your finances and plans.
Submit construction plans: Provide the lender with your final construction plans, specs, and builder details.
Appraisal and loan approval: An appraiser will estimate the future value of the home. The lender then issues formal approval.
Loan closing: With a single-close loan, you’ll sign documents and close on the construction loan. With a two-close, you only close on the construction financing.
Construction phase: The general contractor builds the home. Expect regular inspections from the lender to ensure work is on schedule.
Conversion to permanent loan: Once construction is complete, the lender converts the construction loan into a fixed-rate permanent mortgage.
Move in: Do a final walkthrough, sign off on the home, and move into your new construction!

Tips for Getting Approved

Here are some tips to increase your chances of getting approved for a Fannie Mae construction loan:

Have a minimum credit score of 720 or higher
Put down 20% or more as a down payment
Keep your debt-to-income ratio below 40%
Have 18-24 months of mortgage payments in reserves
Pick an experienced local builder with a solid reputation
Get multiple bids to ensure the budget is realistic
Have the land already purchased and owned before applying

Alternatives to Fannie Mae Construction Loans

Some alternatives to Fannie Mae construction loans include:

Portfolio loans from community banks and credit unions
FHA and VA construction loans
USDA rural development loans
Renovation loans like Fannie Mae HomeStyle
Private lenders and hard money loans

Shop around and compare rates and terms across multiple lender options if you want the best deal. Government programs like FHA, VA, and USDA may offer better rates and terms if you can qualify.

The Pros & Cons of Fannie Mae Construction Loans

Pros

Low down payment options available
Fixed interest rates available
Lower credit score requirements
Can finance primary residence or second home
Allows for customized home building

Cons

Much higher costs than purchasing an existing home
Very lengthy process with lots of complexity
Strict requirements for project plans and financial reserves
Loan limits cap maximum you can borrow

Is a Fannie Mae Construction Loan Right for You?

Fannie Mae construction loans can be a great mortgage option if you want to build a custom home but prefer the low down payment and predictable rates of conforming loans. Just know that building a home is a complex process that requires diligent oversight. If you’re up for the challenge, connect with your loan officer to see if you’re eligible.

How to Get a Fannie Mae Single Close Construction Loan

If you’d like to see whether you qualify for a Fannie Mae single close construction loan, connect with us. To get you started, we’ve outlined the steps and qualifications needed to help you understand the process.

By sharing basic information about the home you want to build, we’ll work with you to see if a Fannie Mae single close construction loan meets your needs and whether you can get pre-approved for the loan.

Next, we’ll begin a more in-depth underwriting process to review your income, credit, ability to repay the loan, and other eligibility requirements. This will include demonstrating proof that you either currently own or will purchase a lot on which your property will be built.

We’ll also work with you and your Fannie Mae-approved builder to determine what the cost and timeline will be to build your home and finance it. We’re with you through each step, leading to a simple and efficient closing so that you can move forward with building your home.

Once the loan closes, you’ll begin construction on your new home within 30 days of the closing date. Your construction team will provide you with regular updates on the progress of your home. We’ll manage the construction phase, including ordering draw inspections, any state-required surveys and inspections, and Fannie Mae requirements.

What is a Fannie Mae Single Close Construction Loan?

The Fannie Mae single close construction loan is a popular option for building new single-family homes. It offers financing that is easier to qualify for and an overall process that makes paying for and building your home simpler to manage.

With a Fannie Mae single close construction loan, you can finance the purchase of your lot, the construction of your new home, and the long-term mortgage that will be needed to afford your home once it’s built.

This streamlines the process, allowing you to close on your home loan once, rather than having to secure two or more separate loans for each stage of the process.

You qualify once and have a single appraisal, loan originator, and closing process. This reduces the time it takes to build and move into your new home, protects you from unforeseen circumstances down the road, and saves you from paying double or triple the closing costs.

Fannie Mae single close construction loans are insured by the Federal National Mortgage Association, commonly known as Fannie Mae, which is a government-sponsored enterprise established to provide a reliable source of affordable mortgage financing.

Because these loans are backed by Fannie Mae, interest rates are kept competitively low and borrowers can make a minimum down payment as low as 5%.

Fannie Mae allows borrowers to lock in interest rates prior to closing, while also allowing them to adjust to the lowest interest rate available during the construction process when converting to a long-term mortgage.

Home construction is complicated and requires many moving parts. Single close construction loans are made to help simplify the process.

Fannie Mae Explained [WHAT YOU NEED TO KNOW]

FAQ

What does Fannie Mae consider new construction?

Additionally, Fannie Mae’s Manufactured Housing guidelines allow for new construction financing, including lot and unit purchase, site preparation, and site installation. It also allows the addition of structures associated with the construction contract, such as landscaping, hardscaping, porches, decks, and garages.

Does Fannie Mae offer construction-to-permanent loans?

Fannie Mae supports the new construction market with two types of Construction-to-Permanent (C-to-P) financing: Single-Closing and Two-closing transactions.

How does a Fannie Mae loan work?

Fannie Mae is a leading source of mortgage financing in the United States. We don’t originate mortgage loans or lend money directly to borrowers. Instead, we purchase mortgage loans made by lenders, who are then able to use those funds to offer mortgage loans to more people.

What is the minimum FICO score for a construction loan?

Minimum FICO score for construction loan: 580-640 Technically, 580 is the minimum fico score for construction loan. However, Mushlin says that in his experience, a higher credit score of at least 640 is usually needed for the FHA construction-to-permanent loan program.