How To Get an FHA Construction Loan

FHA loans are well-known for their low down payments and lax credit standards, making them an excellent choice for first-time homeowners. However, you may be unaware that the FHA also provides construction loans, which may allow you to either build a new house or remodel an old home that requires some TLC. FHA construction loans, like standard FHA loans, are ideal alternatives for purchasers with less-than-perfect credit or who don't have much saved for a down payment. Existing homeowners who want to improve their houses can also utilize them. However, obtaining one of these loans may be time-consuming, and you must fulfill a number of standards in order to be qualified.

Types of FHA Construction Loans

FHA construction loans are classified into two types: construction-to-permanent loans (often known as "one-time closing loans") and 203(k) rehabilitation loans. The FHA's construction-to-permanent loan is intended for customers who want to build a new home. The loan first covers the building of the property, then once completed, it changes into a permanent loan that the buyer pays month to month, just like any standard mortgage. The FHA needs only one closing for both loans. The 203(k) rehab loan is intended for customers who are acquiring an existing house. The loan allows a buyer to roll up to $35,000 in property repairs, upgrades, or other modifications into their mortgage. These can be good possibilities for "fixer-upper" houses. If you currently own a single-family home, you can utilize an FHA 203(k) loan to pay improvements.

Loan Requirements

As with any mortgage loan, the standards for FHA construction loans vary depending on the programme. Here's how eligibility works for both.

To qualify for a construction-to-permanent loan, you must first:
Make a contract with a professional general contractor function
own or are in the process of acquiring the lot on which the property is being built
Make a 3.5 percent down payment, which is the FHA minimum.
Pay a one-time and yearly mortgage insurance premium.
Have a credit score of at least 500 for a restricted loan, or at least 580 for maximum financing (though some lenders set the requirement lower).
Have no FHA loan delinquencies or defaults in the past three years.

Before closing, the property must also fulfill HUD's minimum property criteria for safety and security. Once the home has been built to at least 90%, your lender will arrange a property evaluation to confirm this. You must do the following with 203(k) loans:

Make a 3.5 percent down payment, which is the FHA minimum.
Pay a one-time and yearly mortgage insurance premium.
A credit score of at least 500 is required for a restricted loan, while a credit score of 580 or above is required for maximum financing, depending on the lender.
Have a total loan debt, including rehabilitation expenditures, that is less than the maximum allowed in your location.
You must be the owner and principal resident of the property you are restoring.
Perform one of the HUD-approved qualifying activities.
Have no FHA loan delinquencies or defaults in the previous three years
Have proposals and contracts from qualified contractors specifying your renovations, expenses, and project timelines.

203(k) loans, like construction-to-permanent loans, are permanent mortgage loans. The project expenditures are included into your loan total and spread out across your future monthly installments.

Applying for an FHA Construction Loan

If you're thinking about getting a 203(k) loan, you should speak with a 203(k) consultant to plan and price out the work you'll need for your project. Accurate pricing is essential for obtaining a loan large enough to renovate your house as desired. HUD.gov allows you to look for a consultant in your region. You'll also need to start looking for and screening contractors for your tasks. You must apply for both types of FHA construction loans through an FHA-approved lender. HUD.gov has a comprehensive list of them.

FHA Construction Loans: The Bottom Line

FHA loans aren't simply for buying a picture-perfect home. You may also use them to construct your dream home or to restore a fixer-upper. Regardless of your ambitions, it's critical to locate a lender, builder, and contractor that are familiar with these specialized FHA loans, as they necessitate additional paperwork and documentation before approval.

Frequently Asked Questions (FAQs)

Which lenders offer FHA construction loans?

Many mortgage lenders collaborate with the FHA to provide mortgage loans, including FHA construction loans. Each year, The Balance lists the best FHA lenders based on interest rates, customer service, and the convenience of the application process.

Who may perform the work required for an FHA construction loan?

Contractors that work on FHA construction loans must follow specific standards. The FHA requires contractors to be state licensed and have at least three years of experience. Furthermore, contractors must not be included on the General Services Administration's System for Award Management (SAM), the Housing and Urban Development's Limited Denial of Participation (LDP) List, or the Housing and Urban Development's Credit Alert Verification Reporting System (CAIVRS).