Need to pay for a major kitchen remodel? Or maybe you need to buy land and fund the construction of an entirely new home. An FHA construction loan could help. First, you need to understand how this type of home loan works and how it differs from a standard FHA loan.
Weâll review that in this article, and then dive into the requirements for FHA new construction loans.
An FHA construction to permanent loan allows you to finance building a new home from the ground up, It combines a short-term construction loan with a long-term mortgage all in one, This unique type of FHA-backed financing makes it possible to only go through one loan process from start to finish
As a potential homebuyer, you may be wondering what exactly an FHA construction to permanent loan entails and if it could be the right fit for your new construction plans This guide will walk through all the ins and outs so you can decide if this mortgage option aligns with your homebuilding goals.
What Is An FHA Construction To Permanent Loan?
An FHA construction to permanent loan is a specialized type of financing offered by FHA-approved lenders. It allows you to roll the construction loan and permanent mortgage into one.
Here’s a high-level overview of how this loan works:
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You’ll go through one loan application and closing process.
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The lender will disburse funds in phases as construction milestones are met.
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Once construction on the new home is finished, the loan will automatically convert to a permanent FHA mortgage.
The main benefit of this loan program is that you only have to close once. With a traditional construction loan, you’d have to get a separate permanent mortgage after the home is built. The FHA construction to permanent loan streamlines things by combining everything into one loan.
What Are The Benefits Of An FHA Construction To Permanent Loan?
There are several key advantages that make the FHA construction to permanent loan an attractive financing option, including:
One closing process – You only have to go through the mortgage process once. This saves you time and money on closing costs.
Fixed interest rate – Your interest rate is locked in upfront. You don’t have to worry about rates increasing during the construction period.
Lower down payment – You can qualify with just a 3.5% down payment if your credit score is 580 or higher.
Looser credit requirements – FHA loans allow credit scores as low as 500, which makes it easier to get approved.
Mortgage payment stability – Your mortgage payments on the permanent loan will remain consistent once construction is done.
How Does An FHA Construction To Permanent Loan Work?
If you decide this loan is right for you, here are the step-by-step logistics of how it works:
1. Get pre-approved
You’ll go through the initial mortgage pre-approval process to confirm you meet FHA requirements for income, credit score, and down payment funds.
2. Find land to purchase
The pre-approval letter will show your maximum loan amount. You can use those proceeds to buy land to build on.
3. Select a licensed general contractor
Your lender will want to review the contractor’s credentials to make sure they are properly licensed, bonded, and insured.
4. Complete loan processing
During this stage, an FHA appraisal will be ordered and your lender will verify all documentation provided.
5. Close on the construction loan
At closing, you’ll sign the mortgage note and loan funds will be placed in an escrow account.
6. Begin construction
Once closed, the contractor can break ground! The lender will release funds from escrow in phases as work is completed.
**7. Finish construction **
When construction is done and the home passes the final inspection, you’re ready for the next step!
8. Convert to permanent loan
Within 60 days, the lender automatically converts the loan to a fixed-rate permanent FHA mortgage.
What Are The Requirements To Qualify For An FHA Construction Loan?
While FHA construction loans offer more flexibility than conventional mortgages, you still need to meet certain requirements to get approved:
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Credit score – You’ll need a minimum 500 credit score. The better your score, the lower down payment you can qualify for.
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Down payment – Options range from 3.5% to 10% of the total loan amount depending on your credit score.
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Debt-to-income ratio – Your total monthly debts divided by gross monthly income must not exceed 43-50%.
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Loan limits – Your loan amount can’t exceed FHA mortgage limits for your county.
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Cash reserves – Expect to show 3-6 months of mortgage payments in reserve.
As long as you meet these requirements, you’ll be on the right track to get approved and break ground on your dream home!
What Are The Drawbacks Of An FHA Construction To Permanent Loan?
While this loan has many perks, there are also some potential drawbacks to consider:
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Mortgage insurance – You’ll pay an upfront mortgage insurance premium of 1.75% of the loan amount plus ongoing annual mortgage insurance premiums.
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Higher costs – Between mortgage insurance and financing fees, your total costs may be higher compared to other loans.
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Home inspections – FHA appraisals and draw inspections create more hoops during the construction process.
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Delays – If construction timelines are delayed, your permanent loan conversion could be impacted.
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More paperwork – Expect more paperwork and red tape with the FHA’s additional requirements.
What Are Some Alternatives To An FHA Construction To Permanent Loan?
If upon inspection an FHA construction to permanent loan doesn’t seem like the best fit, here are a few other construction loan options:
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Conventional construction loans – These loans offered by private lenders have less red tape than FHA loans. The drawback is you’ll need a separate permanent mortgage after construction is complete.
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VA construction loans – For eligible military buyers, VA construction loans offer 100% financing and competitive rates.
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USDA construction loans – For homes built in rural areas, USDA construction loans provide 100% financing with income limits.
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Renovation loans – FHA 203(k), HomeStyle Renovation, HomeReady, and more allow you to finance renovations to existing homes rather than new builds.
Finding The Best FHA Construction Loan Lender
The lender you choose plays a big role in getting the best FHA construction loan experience. Here are some tips for picking the right loan officer:
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Look for lenders who specifically mention they offer FHA construction to permanent loans. Not all lenders provide this specialized product.
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Ask prospective lenders how many FHA construction loans they close each year. The most experienced will have higher volumes.
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Inquire about their draw process and how they will manage dispersing funds during construction.
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See if they allow you to lock in an interest rate upfront before construction begins.
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Review online customer feedback about their level of service during the building phase.
Finding a lender well-versed with FHA construction loans can streamline the complex process of building a home from the ground up!
Answers To Common FHA Construction To Permanent Loan Questions
If you’re still weighing whether to utilize an FHA construction to permanent loan, these answers to frequently asked questions may help you decide:
How much can I borrow with an FHA construction loan?
You can qualify to borrow up to 96.5% of the home’s projected value after construction, capped at the FHA mortgage limits for your county.
Can I get an FHA construction loan for a manufactured home?
Yes, FHA construction loans can be used to finance building a manufactured or modular home that meets FHA minimum property standards.
What credit score is needed for an FHA construction loan?
Most lenders require a minimum credit score of 500 for FHA construction financing. The higher your score, the lower down payment you’ll need.
Can I get an FHA renovation loan?
Yes, the FHA 203(k) loan program allows you to finance renovations to an existing home rather than new construction.
How long does the construction phase usually last?
The construction period can range anywhere from 3 months for manufactured homes up to 18 months for custom-built homes, depending on the scope of the project.
Is An FHA Construction To Permanent Loan Right For You?
If you want to build your dream home but don’t have the upfront cash, an FHA construction to permanent loan may be a great solution. The streamlined process, low down payment options, and ability to lock in your rate upfront make this loan program appealing to eligible buyers.
Just be sure to weigh the pros and cons carefully and partner with an experienced FHA lender. While the process involves more hoops and red tape compared to conventional loans, the benefits may outweigh the drawbacks. This loan can make realizing your custom home ownership goals more affordable and achievable!
See What You Qualify For
There are two main types of FHA construction loans. The one youâll need depends on whether youâre building a home or buying an existing home that needs renovations.
An FHA construction-to-permanent loan covers the costs of buying land and building a home. Once the construction of your home has finished, your lender converts the construction loan to a permanent loan. Youâll pay this permanent loan off like youâd pay off any mortgage loan â making monthly payments with interest until you pay off the loanâs principal balance.
Youâll only go through the closing process once on an FHA construction-to-permanent loan, unlike some standard construction loans. Thatâs a plus: Closing costs can be pricey, running 2% â 6% of the total amount youâre borrowing. Going through more than one closing could significantly increase your costs.
An FHA construction-to-permanent loan starts as a short-term construction loan. Under FHA rules, your lender must approve the contractor youâve chosen to build your home. Once approved, your lender will draft a draw schedule for the loan based on the estimated construction process. With each draw, your contractor will be paid so that construction on your home can continue.
Once construction is done, your lender will convert the short-term construction loan to a permanent mortgage. Terms usually last 15 to 30 years. Youâll then make regular monthly payments until you pay it off.
What Is An FHA Construction Loan?
Federal Housing Administration (FHA) construction loans allow you to finance renovations to an existing home or the construction of a new home. Like standard FHA mortgages, these construction loans are backed by the government. Because of this, you can typically qualify for these loans with a lower credit score than standard, short-term construction loans.
Youâll need to meet certain requirements to take out one of these loans. Depending on the project, you might also need to meet with a loan consultant. Theyâll make sure your construction project meets FHA construction loan guidelines.
A construction loan differs from a traditional mortgage. You use a construction loan to fund the building or renovation of a home. A traditional mortgage is instead used solely to purchase an existing home.
Is a FHA Construction to Permanent Loan Right For You?
FAQ
How does an FHA construction-to-permanent loan work?
What credit score do you need for a FHA construction loan?
Can an FHA loan be used to build a house?
What is the downside of an FHA loan?
What is an FHA construction-to-permanent loan?
The FHA construction-to-permanent loan is a hybrid that combines the elements of a short-term construction loan with a traditional FHA mortgage. This versatile loan can be used to acquire land, finance construction costs, and cover lender fees.
Can an FHA construction loan be rolled into a permanent mortgage?
FHA construction loans can be rolled into an FHA permanent mortgage. If you’d rather build a home than buy one, an FHA construction loan could help pay for the project. Like a regular FHA loan, this type of financing is insured by the Federal Housing Administration (FHA) and offered by FHA-approved mortgage lenders. Here’s how to get one.
Do I need an FHA construction-to-permanent loan?
The one you’ll need depends on whether you’re building a home or buying an existing home that needs renovations. An FHA construction-to-permanent loan covers the costs of buying land and building a home. Once the construction of your home has finished, your lender converts the construction loan to a permanent loan.
What are the different types of FHA construction loans?
There are two types of FHA construction loans: The FHA construction-to-permanent loan allows you to build a home from scratch. You can use it to buy land, finance construction costs and cover lender fees. This loan combines the features of a short-term construction loan with a standard, long-term FHA loan.