Do you dream of building a home, but your credit score isn't high enough for a traditional construction loan? An FHA construction loan can help!
Building your dream home with less-than-perfect credit is possible with an FHA Construction Loan.
There are two kinds of FHA construction loans that allow you to include the costs of constructing a new home: the construction-to-permanent mortgage and the FHA 203(k) mortgage.
About Construction-to-Permanent Loan
This loan is considered "all-inclusive" as you can bundle the costs of buying land, the construction, and the lender fees into a single loan.
The FHA construction-to-permanent loan is unique in that it combines the aspects of a short-term construction loan with a long-term FHA loan. When construction is done, the construction loan will automatically convert to your permanent mortgage.
Steps for financing with an FHA construction-to-permanent loan:
Secure the land. You need to own the property upon which you will build your home or use the loan to buy the land.
Get approved. These are the minimum qualifying requirements for an FHA loan:
A credit score of 580+
A debt-to-income ratio of 43% max
A 3.5% down for a HUD-approved project
A 10% down if not HUD-approved
A loan amount doesn't exceed FHA loan limits.
A Licensed Contractor
FHA construction loan requires a licensed contractor or builder. Be mindful that the contractor may be asked to provide documentation that confirms that they are licensed and insured.
Get a Home Appraisal
You'll be asked to get an appraisal that confirms the building materials meet FHA's minimum property standards.
Final Closing and Funding
If the appraised amount is enough to cover expenses, then you'll be ready to close. Otherwise, you'll need to come up with the difference or reduce your renovation costs.
Request Draws as the Work is Completed
The contractor will get paid as the work gets completed according to the schedule you set before closing.
Change to a Permanent Loan
When the home is complete, and you're ready to move in, the lender closes the construction loan and promptly converts the construction loan to a permanent mortgage.
About FHA 203(k) Rehabilitation Loan
An FHA 203(k) loan is perfect for remodeling your home or buying a home that needs serious upgrades. With this type of government home loan, you can roll the total cost into one loan amount.
However, unlike the above FHA construction loan, the FHA 203(k) program allows for minor repairs (projects must total at least $5,000) and major renovations to an existing home.
FHA 203(k) has two options: limited and standard.
Limited 203(k) loans. Use this loan to make improvements to a one- to four-unit property that costs up to $35,000 or less. Many use this loan to replace a leaky roof or install new flooring and subflooring.
Standard 203(k) loans. The standard 203(k) program is perfect for more extensive renovations, such as:
Replacing the plumbing
Making a home wheelchair accessible
Altering the structure
Adding or improving landscaping
Note that the standard 203(k) program requires a licensed supervisor to oversee the project.
You have more options for financing a new construction or remodeling project. A standard construction home loan, VA home loan, and a USDA home loan are but a few of the mortgages available for building a dream home. Contact us today to get matched with the right home loan.