FHA Construction Loan: All You Need To Know

FHA Construction Loan

Want to construct a home from the ground up with effortless finance procedures? Check an FHA construction loan, also called an FHA construction-to-permanent loan. This loan option covers financing for a land purchase, home construction, and a permanent mortgage for the finished home – all in one. Instead of pursuing three different land purchases, home construction and mortgage would include separate documentation and closing costs. An FHA construction loan makes your struggle unchallenging by giving the facility of combining it all in one underwriting process. The Federal Housing Administration supports these loans.

Boon and Bane of an FHA Construction Loan

This loan is for your ease of dealing with the more costly conventional construction loan program. Otherwise, you would have to tackle multiple loans and multiple underwrites from different financial institutes, numerous evaluations, various fees, and possible changes in economic situations that could affect interest rates in results thought to achieve.

However, finding lenders that offer FHA new construction loan is arduous, and it may be grinding to qualify.

Standards are not user-friendly as for a traditional FHA loan. For example, you must have a higher credit score, a lot of documentation, and red tape involved, so the process will take more time than a traditional mortgage to proceed.

How an FHA Construction Loan Functions

FHA construction-to-permanent loan includes four steps. The steps are:

Search the Land That You Will Construct On

You have two options regarding the land purchase, the options:

Your opted land can be vacant, and you already own and have paid all the dues, land with some unclear loan from a bank or third party, or land that you want to pay off entirely at closing.

  • Determine How Much You Are Qualified

You can get to know how much you qualify and what the lender’s standard limits are. You can do this before finalizing your budget and building plans.

If you do not find the land and builder yet, your pre-qualification could be out-of-date, and economic situations as interest rates increase could affect the amount you can borrow.

  • Catch a Builder and Make Plans 

You can start your progress without finalizing the builder but keep in mind that if you do not yet, we would like to let you know here that not every builder wants to work with the FHA construction loan program. 

  • Complete the Loan Procedure and Start Construction 

Once your land and builder are done, an evaluation to determine the forecasted value of a property based on a complete construction can be carried out.

Your credit will be examined during this phase, and your land and builder contracts will be underwritten and accepted. Your lender will confirm your homeowner’s insurance, decide your title, and calculate all final numbers for underwriting.

Requirements of FHA Construction Loan

Multiple rules apply to FHA construction loan or permanent loan, including requirements for the borrower, the property, and the contractor.

Borrower’s Requirements

  • The down payment should be at least 3.5% for FHA financing.
  • The FHA construction loan program needs a credit score of 640 or higher to approve.
  • You must have a clean and decent bank history in the last two years.
  • You must have to show your tax records to ensure the authority about employment and income.

Requirements for Property

  • Your loan should be under the maximum borrowing limit. In most counties, the average maximum borrowing limit is $356,362.
  • The property should be in the locality of an FHA-approved area. 
  • Your property must have to be evaluated by a third party who registers as an architect or structural engineer.

Requirements for Contractor

FHA must approve your opted contractor, who has a license, liability insurance, and a minimum two-year experience of in constructing homes

The remaining funds after completing construction must get off directly towards your loan principal rather than cashback.

Dig more yourself to get more aspects regarding FHA construction loan even though activities related to construction are complex.

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