FHA Construction Mortgage Guidelines On New Construction FHA Loans


This BLOG On FHA Construction Mortgage Guidelines On New Construction FHA Loans Was PUBLISHED On April 27th, 2019

Gustan Cho Associates offers several different types of FHA Construction Mortgage.

  • The most popular FHA Construction Mortgage Loan Program we offer is the one-time close new construction FHA Loan
  • The FHA Construction Mortgage Program is a phenomenal option for those who have family land or had land passed on to them as part of their inheritance
  • Other homebuyers may have purchased they want to build on the lot sometime back
  • The way the FHA Construction Mortgage Guidelines work is that the lender will advance a certain portion of the draw every time each phase of construction is completed

In this blog, we will discuss FHA Construction Mortgage Guidelines and how the process works. The main borrower is the home buyer. FHA Construction Mortgage Guidelines require 3.5% down payment on the after completed value and purchase price of the home. The FHA Construction Mortgage Loan Program is a one-time close. After the project is fully completed, the construction loan converts to a permanent FHA Loan.

Open End And Permanent Loans

An open-end loan is also referred to as a permanent loan.

  • A home buyer will make arrangements to build their home with a reputable home builder
  • The builder will provide their own financing when building the home
  • The home buyer will need to get fully pre-qualified and approved prior to the start of construction
  • When the home is finished, the home buyer will then close on their home loan with their lender

These are very common home loans.

Extended Mortgage Interest Rate Locks

Lenders can lock an FHA Construction Mortgage now although the construction may take time.

  • Rate Locks can get extended as time passes
  • If the construction of the home takes longer than six or more months, the rates will be secured due to rate lock extensions
  • Depending on the FHA Construction Mortgage Loan Program, interest payments on the construction loan may be levied by the loan during the construction phase of the mortgage process
  • Normally a home builder will get their startup initial funding at the time of the first closing
  • Increments of work completed will be paid to the builder as the work progresses

If the lot has been pre-paid and/or the owner owns the lot, lenders will require that the lot ownership be have seasoned in owning the lot for at least six months.

Mortgage Rates And Costs On FHA Construction Mortgage Loans

FHA Construction Loans are considered riskier than traditional FHA Loans. Any new construction loans have pricing adjustments and overlays by the individual lender. Lenders will require a higher mortgage rate on new construction loans. Borrowers are often charged the following fees and costs on new construction home loans:

  • Origination fees and discount points
  • Construction to Permanent Admin Costs
  • Processing and Underwriting Fees
  • Modification and Administrative Fees
  • Title Charges throughout the mortgage process and construction phase
  • Inspection fees
  • Appraisal and appraisal updating fees
  • Plat survey, permitting, and foundation costs and fees

Construction And Mortgage Process Until Completion

All new construction home buyers will close on their land and home prior to the start of the construction process. Prior to final funding, there will be a final home inspection to make sure that the home is built to HUD Guidelines, all permits have been taken out, and the home meets all HUD, city, county, state ordinances, and building guidelines. There are normally five times a lender/title company will send out an inspector to make sure that all trades have been paid and the materials have been paid in full. Each time, the title will be updated to make sure there are no liens against the property. Mortgage Rates are locked prior to the start of the construction so as long as rates are updated and extended, home buyers do not have to be alarmed that the rates will skyrocket.

Maximum Loan Limit

All limits on the loan will be set by the lender. Homeowners cannot go beyond the FHA Loan Limit capped at $314,827 unless they are buying in a high-cost area. Credit requirements are higher on FHA Construction Loans than they are on traditional FHA Loans. Most lenders do have overlays on FHA Mortgage. Debt to income ratios is limited to a maximum of 45% by most lenders. Most lenders will require a two month’s reserves of principal, interest, taxes, insurance (P.I.T.I.). Reserves cannot be gifted. Needs to be borrower’s own funds. Builders and general contractors need to be licensed, bonded, and experienced. Borrowers are not expected to restart the whole mortgage process all over again after completion of the home. NON-Occupant co-borrowers are allowed. To qualify for FHA Construction Mortgage with a national direct lender with no overlays on government and conventional loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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