If you want to build a newÂ home, construction loans are available from many commercial lenders and mortgage brokers. However, these loans can be difficult to get compared to otherÂ conventional loans.
For people struggling to qualify for a constructionÂ loan, the U.S. Federal Housing Administration (FHA) offers financingÂ that becomes a long-term, permanent mortgage with easier credit requirements.
The FHA Construction to Permanent Mortgage program grantsÂ a short-term construction loan that transitions into a long-term, permanent loan after you finish building your home. The loan has a single mortgage closing that occurs whenÂ the loan is secured, prior to the start of construction, which reduces the fees you have to pay. The short-term portion of these loans is designed to facilitate the financing of the actual construction, valued at the cost of construction. The longer-term portion is much like a traditional FHA mortgage.
The FHA doesnâ€™t issue the loan itself; it merely insures such loans made by traditional lenders.
Who builds the home?
In an FHA construction loan, the builder must be a licensed contractor approved by the lending institution. It is possible for the mortgagor to be the contractor on the project if he is a licensed general contractor.
The approval process can take between two to 12 weeks. The builder must often show applicable licenses, two years of tax returns, and proof of the business.
What are the benefits of an FHA construction loan?
An FHA construction loan provides a homebuyer with the same key advantages as other types of FHA loans. These include the following:
- Reduced down payments as low as 3.5 percent in many cases
- Pay interest only during the construction phase of the loan
- Easier qualifications (for those who have a credit score of 620 or higher)
- A higher debt-to-income ratio may be acceptable
Key features of an FHA construction loan
There are several key differences in these loans compared to others. For example, the borrower must purchase the land at the closing of the loan or have owned the land for six months or less at the time of the application of the loan. After the closing, the lender will disburse the funds from the loan over time through an escrow account, with the initial paymentÂ typically used for purchasing land.
A key feature of these loans is a one-time close. In other types of mortgages, a borrower must secure an initial loan, close on it, and then the construction begins. After construction is complete, a traditional loan requires that the buyer obtain a new loan, thus going through the entire loan approval process again, for the permanent loan on the home. This not only takes a great deal of time but doubles the homebuyerâ€™s closing costs.
With an FHA construction-to-permanent mortgage loan, the homebuyer only goes through the approval process once. After the builder wraps up the construction of the home, a thorough inspection is done to ensure the property meets specific term and the city will provide a certificate of occupancy. Once this occurs, the construction loan then will be changed into the long-term, permanent loan that the consumer will continue to pay until the loan is paid in full.
Want to know how much youâ€™ll pay each month on your mortgage? Use Bankrateâ€™s calculators to find out.
When does financing on these loans begin?
The homebuyer will see amortization begin 60 days after the final inspection of the construction is complete or after a certificate ofÂ occupancy is issued. This means the first payment is due that month.
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