Home building is an exciting journey filled with many decisions throughout the entire process.
Whether you’re still deciding on building or have the blueprints for your home in hand, the first step is figuring out which kind of loan you’ll need.
If you’re looking to renovate or build, then an FHA new construction loan might be the loan for you.
We’re going to review what an FHA new construction loan is, how they’re used, what the benefits are, and most importantly—how to take the next step and start your building journey.
An FHA loan is a loan that is backed by the Federal Housing Administration in an effort to make building, or renovating, your home more affordable.
These types of loans can cover the cost of purchasing land, construction, and building and permitting fees.
There are two types of FHA new construction loans
An FHA one-time close loan covers the purchase of land and construction costs into one loan. Once construction is complete, the loan converts to a permanent mortgage loan.
FHA 203(k) loans enable homeowners to purchase and/or renovate an already existing home.
This type of loan can further be broken into two separate loans:
A limited 203(k) mortgage loan allows borrowers to improve their home after moving in, or for making improvements before selling their home. The typical loan range is between $5-35,000 for improvements or repairs.
A standard 203(k) mortgage loan is more targeted for fixer-uppers as they combine the cost of purchase of the home and improvements/repairs.
The loan can be used for structural alterations, additions, upgrades for health and safety, detrimental landscaping, and much more.
One-time close loans work so that you’ll only close on the loan once, which keeps financing simple and convenient—and cuts down on closing costs.
The lender will need to approve your contractor. After your lender has approved, you’ll be provided a construction timeline for the loan.
Once construction is complete, the loan would convert into your permanent mortgage, typically a 15 or 20-year loan.
This is when you would begin to make your monthly mortgage payments.
Standard FHA 203(k) loans differ as they require a loan minimum of $5,000 and they require you to work with a consultant on your project. This consultant will also have to be approved by your lender.
Limited FHA 203(k) loans don’t have a minimum loan requirement and are typically used for smaller projects, valued at less than $5,000.
However, these kinds of loans can’t be used for projects that will exceed six months. With either type, the first step is applying through an FHA-approved lender.
Once you decide on a loan, the process looks like this:
It’s imperative to ask your potential lender what is required at each step. and about their turn-around time in between each phase so you know what to expect and when fees will be due during the process.
There are pros and cons to every loan type. Let’s look at the pros and cons of the FHA construction loan, to determine if it’s right for you.
Speak with a home loan advisor so they can explain the unique elements of each construction loan and how they can be beneficial to what you’re looking for.
Most FHA construction loans have the same standards as FHA purchasing loans but are possible with a few additional requirements.
While there are standard requirements you can expect, ask your potential lender exactly what they require to be approved for an FHA construction loan.
In most cases you must be able to meet and provide:
The property or project you’re going to build must meet specific requirements as well. This includes:
Lastly, the contractor must provide the required licensure, liability insurance, and a minimum amount of experience building homes.
Before you meet with a professional, write down any questions you have in regards to the requirements. That way you know if an FHA construction loan will be your best option.
While the process may seem daunting, rest assured you can build the home you’ve been waiting for when you work with the right FHA construction loan lenders.
GO Mortgage has a history of making dream homes happen with their home loans.
Request a consultation with a home loan advisor to discuss their experience and how they can help you.