Understanding FHA Home Construction Loans

When you dream of the house of your desires, many times it demands to be a reality. Realising just that enables you to create an atmosphere specifically fashioned to your lifestyle of choice and your family’s needs. The building phase is usually accompanied by hurdles. But for millions of households every year, the outcome is spectacular.

Given that you are able to meet basic loan requirements, available for every type of borrower are multiple FHA loans suited to accommodate whatever chapter you’re at in life.

To begin, this article will focus on two types of FHA construction loans: 203K and construction-to-permanent. These FHA construction loans also have subtypes under them, and it is best to know what each are for to find out which loan type best meets your needs.  

Here are a few FHA construction loan subtypes:

203k Streamlined

First on the list under 203k is Streamlined. For this loan type, a borrower may be lent a maximum of $35,000 to spend on replacements, repairs, and any home development that does not call for drastic constructional activities. While a maximum amount is established, there is no set minimum. So if you’re eyeing on re-carpeting or upgrading furniture and a few appliances, you may have it listed under your loan without having to shell out cash.

Luxury upgrades such as adding hot tubs, indoor basketball and tennis courts, and swimming pools are not covered. An additional rule is that these repairs have to start within 30 days of the borrower’s loan closing and must be finished within six months.

203k Standard

Second on the list under 203k is Standard. Unlike Streamlined where no minimum amount is established, Standard’s smallest loanable amount is $5,000. Oppositely, the maximum amount is dependent on other factors such as one’s region and chosen house type.

This loan format demands bigger, more drastic structural changes. Examples include redesigning bathrooms, subdividing bedrooms, re-doing the basement or basically any repairs that contribute to improving property value.

Keep in mind, though, that the no-luxury upgrade still applies in this format. Other than the renovation element, a noticeable difference between this and Streamlined is that this loan type requires collaboration between the borrower and an HUD-approved realtor who evaluates the entire architectural process.

For Standard, the receiving end of the loan is may finance as much as 6 months of mortgage rates into their 203k loan. This applies if the house is uninhabitable for a time during the construction phase.

FHA One-Time Close

texas fha loanAnother viable option with construction loans is FHA’s One-Time Close or OTC. To put simply, it combines the financing needed in purchasing a lot, construction, and standard residential mortgage fees into one loan. Also referred to as construction-to-permanent, this loan type empowers a borrower to apply for a loan that lets him build a house from the ground up.

Generally, FHA loans are more generous and are kinder to a larger sea of economic profiles. Conventional loans demand for a borrower to have a FICO credit score  of at least 620 to 640 to qualify. Federal government-insured loans, on the other hand, may accommodate people whose credit scores are as low as 500.

Borrowers whose credit score is at least 580 may have the chance to expend only a minimal 3.5% in down payment. Adversely, those whose credit score is anything lower are required to pay an upfront 10% house deposit. Still, these are much nicer terms compared to a conventional loan’s 5% to 20% required down payment.

At the same time, the FHA One-Time Close is a different beast on its own. It is pricier than many other loans in that it oversees the creation of an actual home from scratch. That said, its requirements are as follows:

  • A 640+ credit score is required
  • Maximum debt ratio of 45%
  • No bankruptcy in the last two years
  • Without foreclosure in the last three years
  • No major credit collections over $5,000 in the last two years
  • No open judgments or tax liens

Although similar in many ways, all these loans are different from each other. That said, your present circumstance should determine what loan is best for you. If you’re out in the house market looking for a place you can turn into a humble abode, chances are you should be loan-searching, too. Go over these loans thoroughly and smartly to make sure you apply for the right one.

by jkyle