Are you a first time home buyer looking to build a home?
FHA loans are popular because of their low down payments and lenient credit standards, making them an excellent choice for first-time home buyers.
But did you know that FHA also offers construction loans?
FHA construction loan is used to fund the development of a new home from the ground up.
It combines the benefits of a short-term construction loan with those of a traditional FHA loan, allowing you to get cash upfront to buy land and build a house, then converting to a permanent mortgage once the work is over.
The Federal Housing Administration-backed construction loan covers costs such as land acquisition, contractor costs, construction work, and permit fees.
Here’s how the FHA construction process works.
How Does a FHA Construction Loan Work?
You will get both a construction loan and a regular mortgage with an FHA construction loan. As a result, you’ll only have to close the loan once.
It begins as a short-term construction loan and then converts to a mortgage once construction is completed.
Your lender must approve the contractor you choose before you could even proceed with a FHA construction loan. You’ll be put on a draw schedule for the loan based on the different phases of the project once the contractor has been approved.
During the construction phase, interest only payments will be made.
When the construction is finished, the lender changes your construction loan to a permanent mortgage, which is normally for 30 years.
Then, just like a traditional home loan, you make regular payments on your mortgage.
How to Apply for an FHA construction loan
To apply for the FHA construction loan, you’ll need to find a lender that can originate these loans. Unfortunately, not all lenders offer the program.
Our company, Coole Home, has an FHA construction program available. You’ve come to the right place. =)
Once you’ve found a lender, the next step is to submit a loan application along with several documents lenders require for a an FHA pre-approval.
FHA Construction Loan Application
Start the process by clicking on the button below
The FHA loan application will ask several questions about your income, employment, marital status, current address, the amount paid for rent or a mortgage, debt obligations, credit, Etc.
When completing the application, try to be close to accurate as possible.
The lender will be verifying the information listed on the FHA application.
Giving your lender complete and precise details during the pre-qualifying step can help prevent surprises later during the mortgage underwriting process.
For example, if you make $3000 a month in income, do not put $6000 because this information will be verified.
Once the application is submitted, the next step is getting your paperwork to the lender.
Paperwork needed for FHA Construction Loan
This paperwork will be needed for all borrowers that are on the loan.
- Last 30 days of paystubs
- Last 2 years of W2s
- Last 2 months of bank statements
If you’ve had a bankruptcy
- Copy of the Bankruptcy documentation including all schedules
- A simple letter explaining why you had to file for a bankruptcy
If you’ve had a foreclosure or a short sale
- A simple letter explaining why you had a short sale or a foreclosure
- The address of the property
If you are retired
- A copy of your award letters for Social Security or VA benefits.
- Or a copy of your monthly income statements
If you are self employed
- Last 2 years of your personal tax returns
- Last 2 years of your business tax returns
If you own a home
- Most recent mortgage statement
- Copy of homeowners insurance policy
What happens after the FHA Construction application and paperwork has been submitted?
A mortgage loan officer will review the loan application and your paperwork to determine if you can qualify.
This process can take a few days.
If everything checks out, the loan officer will issue a pre-approval letter.
Once that is done, you’ll need to hire a contractor and have a conversation with them about the cost to build a home. The contractor must have a license, proper insurance and any state required bonds. This documentation needs to be submitted to the lender for approval. (Financials may also be requested),
After a contractor has been selected, find the land that you want to purchase.
Once you have the land picked out, you’ll need to have a conversation with your contractor on how much it will cost to build on the land selected.
The cost to build and the cost of the land cannot exceed your pre-approved amount.
What are the FHA Construction qualifying requirements?
- Minimum credit score of 620.
- Down Payment of 3.5%. Down payment will be based on the total of land cost and construction cost. For example, if the land purchase is $100,000 and the cost to build is $300,000 the total loan amount is $400,000. Down payment is 3.5% of $400,000.
- Consistent work history for last 2 years. Is your hourly or monthly income consistent on a weekly/monthly basis? Have you had a job for the last 2 years? We prefer a consistent employment history for the last 2 years.
- A reasonable debt to income ratio. Generally a 42% debt to income ratio would be perfect but we have approved loans with a ratio as high as 56%.
- Bankruptcy. How long has it been since the bankruptcy? For a chapter 7, two years must have lapsed since the discharge and a chapter 13 we like to see on time payments to the trustee for the last 12 months.
- Foreclosure or Short Sale. How much time has lapsed since the foreclosure or short sale? We typically require a waiting period of 2 years on VA loans. Read more about this: Buying a House After Foreclosure
- Home must be your primary residence. The FHA construction loan is only for primary residences. If you live in Florida but are trying to build a home in Texas, questions will be asked to determine if the home being built is really your primary.
Are you ready to apply? Start the process by completing the form below.
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