June 9, 2022
There are FHA mortgages that let you build a home from the ground up on land you already own or purchase in conjunction with the mortgage. These are called FHA One-Time-Close mortgages. There are also FHA loans that can help you buy and renovate a home. These are called FHA 203(k) Rehabilitation loans and they are also available as an FHA refinance option.
Both types of loans will require you to use escrow, hire builders, and have custom work done. And if you have never done this before, there are a few things to know going into the process.
Did you know that not all builders are suitable for construction loans? Not every licensed contractor has experience with a large project such as a home renovation, and you will want to ask how many similar projects your builder has worked on before you decide to hire.
Research is important when building or renovating a home and you will want to apply the same level of effort to researching your neighborhood before the work is planned.
That is common sense when it comes to building a new home but why would you want to research the neighborhood if you are renovating with an FHA 203(k) Rehab Loan instead?
One important reason is that if you are upgrading your home, you’ll want to know you aren’t upgrading it too much. If other houses in the area have budget features and you upgrade to luxury features instead (think countertops, siding, fixtures, appliances, etc.) you may actually improve your home in such a way that detracts from its sale potential.
You will want to ask questions about the comparable homes in the area and how your planned improvements might compare.
In the real estate industry, upgrading too much is known as over-improvement and it can actually make a difference when it comes to loan approval to buy such a property.
Remember, when the appraiser reviews your home before it goes up for sale, that process includes looking at your home side-by-side with other comparable homes in the area, known as “comparables”.
Before you commit to a construction loan or a rehab loan, you’ll want to ask your lender about important issues including when your mortgage payments begin. For some construction projects, you may not be able to occupy the home on the closing day due to the renovations.
You may find that some construction loans and rehab loans don’t require full mortgage payments to begin until after construction is complete. You may be asked to make interest-only payments during this time, but you may still be required to pay off the loan in the original mortgage term.
That means you could see your loan term start and several months go by before you are expected to make a payment. If you close on your loan in January and you move in July and start making your payments then, your loan term is still 15 or 30 years from the closing date–NOT the date you started to make your mortgage payments.
Ask your loan officer about this issue and how it may affect your mortgage payments.
Learn More About FHA One-Time Close Construction Loans
We have done extensive research on FHA One-Time Close mortgages and spoke directly to the licensed lenders for most states. These are qualified mortgage loan officers who work for lenders that know the product well.
Each company has supplied us with the guidelines for their product. If you are interested in being contacted by one licensed lender in your area, please respond to the below questions to save time. All information is treated confidentially.
Your response to onetimeclose@fha.com authorizes FHA.com to share your personal information with a licensed mortgage lender in your area to contact you.
Please note that the FHA One-Time Close Construction Program only allows for single-family dwellings (1 unit) – and NOT for multifamily units (no duplexes, triplexes or fourplexes).
1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your credit score and/or the Co-borrower’s credit score, if known. 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans?
5. If either of you is an eligible veteran, the down payment is $0 up to the maximum VA lending limit for your county. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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