A Guide To FHA Construction Loans

How Does A One-Time Close FHA Construction Loan Work?

Ready to apply for an FHA construction loan, either a construction-to-permanent or 203(k) mortgage? Here’s what you can expect.

1. Get Preapproved For A Mortgage

During the preapproval process, a mortgage lender will review your credit and verify your income to determine how much of a loan it can give you. Getting preapproved is a key step in the FHA lending process: It lets you know how much you can afford to spend on either building a home or buying an existing one.

During this process, your lender will check your credit report and credit score. To qualify for an FHA loan, you need a FICO credit score of at least 500. Be aware, though, that many lenders won’t approve you for a mortgage unless your score is higher, often 580 or higher.

Lenders will also review your finances and require you to provide copies of such key documents as your two most recent paycheck stubs, 2 months of bank account statements and the last 2 years of your tax returns.

2. Select A Plot Of Land

If you’re building a new home, you’ll have to select a plot of land. Make sure this land meets the requirements of the FHA. For example, you can’t take out an FHA construction loan if your land sits near an oil or gas well, is too close to an airport or is near an area that is likely to suffer from floods.

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3. Work With An FHA-Approved Consultant

If you’re taking out a 203(k) loan of $35,000 or more, you’ll need to work with an FHA-approved 203(k) consultant. This professional will review your project plans and the contractors you have hired to make sure they meet FHA construction standards.

You won’t need to meet with one of these consultants if you are taking out a 203(k) loan for $35,000 or less. You also won’t need a consultant to apply for an FHA construction-to-permanent loan, though you will need to provide documentation to your lender showing that you are working with a licensed contractor.

4. Close On Your Construction Loan

In many ways, applying for an FHA construction-to-permanent or 203(k) loan is much like applying for any mortgage loan. Your lender will review your credit report and credit score.

The process does differ in some ways, though. For a construction-to-permanent loan, you’ll first close on a short-term construction loan that will only last while construction is taking place. Once construction is over, your lender will convert the loan to a standard primary mortgage. You can choose the term of your new loan – two popular choices are 15 and 30 years – and begin making monthly payments, with interest, until you pay off the loan.

With an FHA 203(k) loan, you’ll close for an amount higher than your home’s purchase price, with this extra money being used to fund planned renovations. If your home costs $250,000 and you plan on $50,000 of renovations, you’d take out a standard 203(k) loan for $300,000, using the extra $50,000 to cover your home’s repairs.

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