Are you interested in availing of the FHA new construction loan? It is pretty similar to the usual FHA loan you are accustomed to. The main difference is that it combines the standard FHA and short-term construction loans. Your loan is automatically converted into a permanent mortgage once the construction is completed.
FHA new construction loan steps
If you are thinking of applying for an FHA new construction loan, here are the simple steps you need to do to start the process:
- Identifying your land. Did you know that not all lands qualify for an FHA loan? If the land you want to build your home is near areas like an airport or oil or gas well, and if the site is susceptible to flooding, these will not be allowed.
- Getting your preapproval for an FHA loan. Applying for the FHA new construction loan is relatively more accessible than the conventional loans available in the market. For one, the credit score requirement is at least 500, and the debt-to-income (DTI) ratio is 43%. For a credit score of at least 580, prepare for a 3/5% down payment. Is your credit score between 500 and 579? If yes, there is a 10% down payment requirement.
- Finding a builder and getting an appraisal. A new construction loan requires working with a licensed builder or contractor. They will need to provide proof of their license and insurance. Then, get a home appraisal and confirm that the materials used to build meet the minimum property standard set by the FHA.
It’s the closing time once the preliminaries are done. If the appraisal is enough to cover the cost of the building, good, but if not, you may need to review your plans and cut back. You can also raise money to cover the cost difference. Once the home is finally built, and you are ready to move in, the lender will close your construction loan and transfer it to a permanent mortgage within 60 days after closing the loan. That is how your FHA new construction loan works from start to finish.
