Mortgage and Portfolio Loan Guide

Building Your Home with an FHA Construction Loan

Getting an FHA construction to permanent loan is a wonderful opportunity to build the home you want, with a lower down payment than most lenders require on a construction loan.

In this article we’ll cover all the main points you need to understand if you’re looking to build a home from the ground up with an FHA construction to perm loan.

How to Get an FHA Construction to Perm Loan

When existing home inventory is low, building your own home is often a very attractive idea. You get to select the location, the builder, the floor plan, the paint colors… everything! The problem is that most lenders want 10-25% down payment when considering terms on a construction loan.

With an FHA construction to permanent loan the down payment can be as low as 3.5%.

This low down payment option is extremely encouraging news to many borrowers looking to build a home.

Here are the top things you need to understand when considering an FHA Construction to Permanent Loan

Pre-Approval

First and foremost, you need to make sure you’re eligible for an FHA loan.non-warrantable condo

Get apply today to make sure you meet all income, credit, and asset guidelines. If you don’t meet normal FHA guidelines, there is no sense in seeking an FHA construction loan.

The good news is that FHA guidelines are less strict than other traditional mortgages, so many times it’s just a matter of getting a few ducks in a row to get the qualification in line.

Selecting Your Builder

Once you have gotten confirmation that you’re eligible for FHA financing, you’ll need to find the right builder for you.

You’ll want to see what work they have done in the past, how long they have been in business, what types of projects they are willing to take on, and how long they typically take to build a home with the same characteristics you’re seeking.

A very important thing to keep in mind is the chemistry you have with the builder. You’ll be communicating with this person heavily over the next 6-12 months. It’s super important that you feel comfortable with your builder from an experience and service standpoint.

Builder Approval

After you have selected the right builder to meet your needs, it’s time to get that builder approved with your lender.

With an FHA construction to permanent loan, not only do you have to be approved as a borrower, but the builder also must go through a detailed approval process. They’ll need to provide things like: references, two year’s tax returns, a year to date profit and loss statement, applicable licenses, and more.

Depending on the builder, this approval process could take 2-12 weeks. It really just depends on the availability of the builder to provide the documents needed.

Site Selection

If you have been pre-approved, and your builder has been approved, things are certainly moving in the right direction.construction to permanent loan lenders

At this point it’s time to select the right lot to build your home on. With an FHA construction to perm loan you can finance the land and the construction all in one loan. If you already own the land, even better. You are able to use the equity that you have toward down payment.

Example: you own a 2 acre parcel that you are looking to build on. Let’s say the lot is worth $20,000 and you own the land free and clear. The 20K in existing equity can be used as collateral toward your down payment.

Very important – FHA does NOT allow any value to be given to any existing buildings on the lot.

The appraised value of the lot will be based on raw land. If you have a barn on the land worth 20K, and the land is worth 20K, that does not mean FHA will consider it to be a full existing value of 40K. Only the land can be considered with regard to existing equity.

Project Approval

Once the site is selected, it’s time to get set figures from the builder regarding what the costs are going to be from start to finish.

When you have come to terms with the builder on the numbers, the lender will review the construction agreement and structure your loan accordingly. FHA does NOT allow the borrower to be involved with the construction in any way.

The builder must be responsible for all construction and improvements in the construction agreement. The borrower cannot act as the builder.

Loan Structure

FHA loans have limitations on how high the loan can be in each county in each state.

FHA construction to permanent loans are no different with regard to county loan limits. Here is a site that tends to keep county construction to permanent loan lenderslimits up to date.

During the construction period, the builder is responsible for covering monthly interest only payments on the construction loan. This creates a win/win scenario for builder and borrower. It’s a win for the builder because they know they payment will be made (they don’t have to rely on the borrower making payments to keep things moving along).

It’s a win for the borrower because if the builder is responsible for payments, they are more likely to treat the build with urgency because they don’t want to be stuck with carrying the construction loan payments for more months than necessary.

Once the home is completed, the loan is converted to the FHA loan for the borrower to begin making payments on.

Construction Contingency

There are typically changes to the materials or slight modifications to the specifics in the contract causing overages on top of what was originally estimated.

Construction contingencies are available for project cost overruns and borrower change orders. Basically, whatever the estimated cost and labor is, the lender will increase that estimated amount by 5% to account for unforeseen extras. If the funds are not used, the difference will be applied toward the principal balance (the loan will have a lower balance at the time it is converted from construction to permanent).

One Time Closeconstruction to permanent loan lenders

There are two different types of construction loans: one time close, and two time close.

A two time close means you get approved, get appraisal, and close on the construction loan. Once construction is complete, you get approved all over again, get another appraisal, and then close on your permanent loan.

With the FHA product, it’s a one time construction loan. This means you do NOT have to go through the process twice. You get approved up front, get appraisal up front, and close. Once the construction is completed, final inspection is done, a certificate of occupancy is provided, and the construction loan is converted into a permanent loan.

You do not have to get approved all over again on a one time construction loan.

Basic steps toward your FHA Construction Loan approval:

  • Get pre-approved
  • Get builder approvedfha construction loan
  • Select your lot
  • Complete construction/purchase agreement with builder/seller
  • Get project approved through lender
  • Complete loan approval (complete conditions with lender, appraisal, title, etc.)
  • Close on construction loan (provide down payment/costs/escrows)
  • Begin construction
  • Construction complete
  • Move into your newly built home, begin making payments on your FHA loan

Building a home is not a good fit for everyone.

There is more to manage and more decisions to be made when building a home than when buying an existing home. But if you are considering building a home, an FHA construction to perm one time close loan may be a great option for you to consider.

Not what you’re looking for? FHA 203k rehab loans here.


 

I invite you to reach out to me.

Get your questions answered.

 

 

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The Mortgage Collateral

The Property Piece of the Mortgage Puzzle

It’ game time. You have the steady job. Your down payment is sitting safely in your bank account. Your credit expert helped you get things cleaned up. You’re now ready to buy a home! It’s time to put together the last piece of the mortgage puzzle, the property. This is where the fun begins. The factors to consider when figuring out what home fits you the best are endless. This should help you gain an understanding, and a snapshot on how the process works when you find the home of your dreams.
 
Collateral
 
The home you are purchasing is the collateral being used to secure the financing you’re getting. If you expect a lender to give the green light to finance a home for you, be prepared for them to perform due diligence as well. Your lender will have certain standards that the property needs to meet. 
 
Inspection
 
Once your Realtor has helped you negotiate an amazing price, it’s time to order the inspection. Although lenders mortgage collateraldon’t typically require a general inspection to be completed by a licensed inspector, it’s highly recommended that you get one yourself. Your Realtor usually will have a couple recommendations of credible inspectors in your area. An inspection can cost anywhere from $300 to $800 depending on the scope of work and the property size. Your inspector will examine each component of the house in order to give an opinion on what meets code (electrical, HVAC), what doesn’t meet code, and what the estimated remaining life of items might be (water heater, roof, furnace). The cost that you pay for an inspection pales in comparison to the value you receive by knowing exactly what you’re “getting yourself into” with a potential home purchase.

Appraisal

Your lender will require an appraisal to be completed, and will submit an order through a third party. There is no need to order your own appraisal because privately ordered appraisals cannot be used or considered by a lender. The cost can vary depending on scope of work and property size. Typically $400-$750. The purpose of an appraisal is to get an opinion of fair market value of a home, and to find out if there are any serious issues with the home (peeling paint, broken windows, mold…). The appraiser will physically go out to the property to do an general inspection, take pictures, and take measurements. The appraiser will pull records of recent sale history for similar properties that have sold within the area of the home you’re buying. He/she will take into consideration the square footage, amenities, condition, age, and other important factors that contribute to value. The appraiser will make specific adjustments to value based on how those factors compare to the actual property being sold. By doing that, the appraiser can make an educated decision of what people are willing to pay for a home that is similar to the one you’re buying. This is called the sales comparison approach. This approach gives the best indication of what the fair market value is because it’s based on what people are actually willing to pay in that given market. If any repairs needed are noted by the appraiser, there is a strong likelihood that those repairs will need to be completed. You don’t necessarily want to make any repairs, nor will you be authorized in most cases, because you don’t own the home yet. What if you spend $100, and a Saturday afternoon installing a rail on a porch, just to find out you can’t close on the home for other reasons? Doesn’t make much sense.

Property Type

  • Single family home – This is your typical stick built, built from the ground up, free standing home. You’ll be required to maintain your own landscaping, snow shoveling, and exterior maintenance. You may or may not have an organized homeowners association (HOA) in your neighborhood. The HOA will help with general street maintenance and neighborhood needs. Be mindful of what the HOA fees are because it can have an impact on your debt-to-income ratio. In some areas you may think you’re buying a single family home, but find out too late that it’s a “site-condominium”. Depending on your loan program, your lender may have to do a more extensive review of the property and HOA if the home is found to be a site-condo.
  • Condominium – This can be a home in a community of 1 or 2 story homes that are attached, or a building of many stories containing units stacked on top of one another (like an apartment building). You own the interiorcollateral mortgage of the home. The exterior is typically maintained by the HOA, so the HOA fees are typically more costly on a condo. There are usually amenities like a pool and exercise facility among other things. Condos are popular for people who want to enjoy the benefits of homeownership, but pass on the headache of maintaining anything outside the home. Condos require a more thorough review than any property type. The lender will examine the financials of the HOA in detail. They’ll look for things like reserves, delinquent owners in the community, and insurance coverage. If you are getting an FHA loan or a VA loan, you can find out what condos are already approved in your area. For FHA approved condos in your area click hereFor VA approved condos in your area click here
  • Townhome – A townhome can be a very similar setup as the condo that’s in a community with 1 or 2 story homes that are attached. With a townhome you do own the land outside but the HOA will cover day to day maintenance usually. Your lender will contact the HOA, but typically will not be as strict on guidelines as they would be on condos.
  • Manufactured home – These are homes that are built in a factory and placed on a piece of property. It can be a challenge to find a lender for manufactured home financing. One of the reasons many lenders do not offer financing on manufactured homes is because manufactured homes typically depreciate in value. In other words, the value of the home will likely decrease over time. Whereas the value in a single family home, condo, or townhome, will typically increase (appreciate). Of course the housing meltdown in recent years has made many people question that fact. But historically, real estate is a great investment, and will appreciate in value.  
  • Multi-unit – any property that is being sold as piece that has several functional dwellings (units). These are duplex (2 unit home), triplex (3 unit home), and fourplex or quadplex (4 unit home). You can obtain a residential mortgage on multi-unit homes as long as they are 4 or less units. Anything with 5 or greater units will require a commercial loan. Multi-unit homes are a great way to supplement your income and have your mortgage paid for by the tenants.

Escrow Account

  • General – Your escrow account is a cushion set aside so that you have adequate funds available to pay your taxes and insurance when they are due. At closing you’ll pay for your full year of homeowners insurance, and several month’s worth of your taxes (depending on the time of year and frequency of taxes due). In your mortgage payments moving forward you’ll pay a fraction of your annual homeowners insurance and taxes. Each payment will contribute to your escrow account so that enough is accumulated when the next tax or insurance bill is due. Your lender will manage your escrow account for you. This keeps things simple for you because you do not have to worry about having to pay a large bill for taxes and insurance two or more times per year. It’s all included in your payment so you have less responsibility to manage. If you have a FHA loan, VA loan, or put less than 10% down, you’ll be required to have an escrow account with your lender.
  • Insurance – You’ll need to obtain an insurance policy to cover unexpected, significant damage on the home. Each property type will have different requirements, and needs that will be covered. Your Realtor and your lender can give you insight on what type of coverage to get. Certainly the insurance agent you choose will be the expert in that field on what coverage you need.
  • Real Estate (property) Taxes – Be mindful of how much the taxes on your property are. This can make a significant difference on your budget and your debt-to-income ratio. Your taxes are likely to fluctuate, which can cause an adjustment in your monthly escrow payment.

Congratulations! 

With the information you’ve been able to acquire by skimming through the “keeping your home loan process simple” series, you’re now more prepared than the vast majority of home buyers. Use this as a reference. Use it as a tool to come back to as you get closer to being ready to take the next step into the American dream. Subscribe by email to stay in the loop on the latest and greatest info on homeownership, and balanced living.  

A few closing tips…

From Livingston County, Michigan expert, and licensed inspector, Dominic Vagnetti of Inspections on Demand. 517-540-0800

 

-Roof conditions and foundations are the two most worrisome items for buyers. Roofs are a disposable product and we want to start paying extra attention as they reach their 20th birthday. We are seeing longer lifespans from dimensional (or architectural) designs, however exceptions are always present. Curling, granule loss, missing shingles are things a buyer can see driving up to the property.

-Foundation cracks can be problematic but are most commonly superficial. Look for signs of water leakage that would require injection sealant, gaps larger than 1/4 inch, or horizontal cracks which can be signs of significant movement.

-Foundation waterproofing and drainage are mostly typical of 1970s and newer homes. Prior to that, sump crocks and foundation drain lines were either not present or poorly designed. Signs of water damage or flooding can be found by examining homeowner belongings on the floor or looking for stains on wood walls or shelving. It can be important to differentiate between ongoing flood issues and a single water event like a water heater failure or leak in a pipe.