Aspiring homeowners often seek government-supported loans for the purchase of a residential property. Government-backed mortgages (FHA loans) are often a viable option for first-time homebuyers since they require lower down payments and credit scores than many conventional loans.
However, securing a traditional FHA loan is often easier said than done. For example, some neighborhoods are populated with outdated properties that don’t qualify for conventional FHA mortgage loans. And even neighborhoods with newer houses may not meet the needs of an applicant that wishes to build their own home.
Read on to learn how to use an FHA loan to help finance a new home build or renovate a property you are looking to purchase.
What is an FHA Construction Loan?
Prospective homeowners can use an FHA construction loan, also known as a “construction-to-permanent” loan, to finance the purchase of land, home construction, and the implementation of a mortgage for the completed project. This is a convenient option for individuals hoping to build a new home as it eliminates the need to secure three different loans.
New Construction Home Types
When it comes to securing an FHA construction loan, there are three main types of property that the Federal Housing Administration may approve.
- Proposed Construction: This type of property does not yet contain any permanent or concrete material.
- Under Construction: This type of property may be anywhere in the construction process, from the initial placement of material to 100% completion.
- Construction Under 1 Year: This type of property already has a constructed home less than one year old. This home must have never held occupants.
Guidelines for FHA Construction Loans
To be approved for an FHA construction loan, there are several guidelines that an applicant must meet. Depending on the exact type of property the applicant is hoping to finance, the guidelines for approval will vary.
For a property to get approved for FHA mortgage financing, it must not be in or near a flood zone, near an airport, or close to an oil/gas well. Additional guidelines may apply to specific geographic areas.
The preapproval process usually requires minimum credit scores of 500 and a debt-to-income (DTI) ratio below 43%. However, some homebuyers may qualify with a DTI of up to 50% in rare cases.
FHA construction loans typically require a down payment of 3.5% for applicants with a credit score of 580 or higher and 10% for applicants with credit scores of 500-579.
A licensed contractor must complete the construction of the new home, and the expenses cannot exceed the loan amount. Once the contractor has finished the building, a licensed appraiser must survey the property to ensure that it meets FHA standards.
After construction is complete, the builder gets paid, and the loan is then converted into a permanent mortgage. This allows the borrower to pay toward the mortgage the same way they would for an ordinary home purchase.
To learn more about the FHA lending process for financing a new home, reach out to lenders in your network. A lending professional can provide you with valuable information about the loan you seek and the market in which you hope to reside. Further, researching your options with several companies may help you secure the best loan for your family’s unique needs.