Buying a home in Eugene, OR, takes creativity as houses are expensive and in short supply. An FHA construction loan makes creating a home a doable dream. Keep reading to find out how these particular types of home loans can lead you to homeownership.
FHA Construction Loan Basics
What is an FHA construction loan? Essentially, it’s a way of financing construction along with a mortgage. You can use this kind of loan to build a new home or significantly renovate an existing property. Since the construction and mortgage roll into one loan, you’ll only need to qualify and pay fees for one loan package.
The two different scenarios that fall into this type of financing arrangement include
- FHA (203)k Rehabilitation Loan for extensive home renovation
- Construction-to-Permanent Loan for a new home build
Unlike many other home construction loans, it’s not especially difficult to qualify for an FHA-backed loan. You can usually obtain an FHA loan with a higher debt-to-income ratio than conventional loans demand. Generally, credit scores in the range of 620 to 700 are high enough to meet the lender’s minimum qualification standards.
One downside of the FHA construction loan is that you’ll pay higher closing fees than you would with a regular FHA home loan. Still, the fact that you’ll receive two loans rolled into one transaction minimizes the hit to your wallet.
Keep in mind that your lender won’t hand you a basket of cash to complete a home renovation. Instead, you’ll need to follow a step-by-step process that leads to a beautifully renovated house. Let’s take a look at the four-step process that you can expect with an FHA (203)k loan.
No.1- Determine the Scope of Repairs
Before you begin speaking with potential lenders, it’s smart to decide on the property’s scope of desired renovation projects. Fortunately, you can use this loan to perform a wide range of renovation projects. Examples of allowable projects include
- Safety Upgrades
- Roof Repairs and Replacements
- Plumbing Repairs and Upgrades
- Accessibility Improvements
You’ll need to work with a HUD consultant throughout the process if you plan to do significant structural repairs to the house. Be safe and hire an expert general contractor with substantial experience in completing similar FHA (203)k projects.
No.2- Find a Lender
You’ll have to locate a mortgage lender approved to offer FHA construction loans. As with all mortgages, it’s smart to shop around and interview several brokers before choosing your lender. Once you pick a lender, you’ll work with them to complete the loan approval process.
As we mentioned, it’s relatively simple to qualify for an FHA mortgage. As long as you meet the income-to-ratio limits and possess a decent credit score, you’ll likely receive loan approval. You will need to put forth a down payment amount that varies according to the total loan amount.
No.3- Pick a Contractor
Your contractor must be licensed and insured. The contractor must know how to handle a significant amount of paperwork throughout the project, and it’s always helpful to partner with an experienced expert in home renovation.
One of the contractor’s first responsibilities is to collect bids for the different parts of the project. Your lender’s appraiser uses the dollar amount of the chosen submissions to determine the future value of the finished renovation.
No.4- Closing and Construction
As soon as you have your final bids, the entire loan application goes to an underwriter for approval or denial. Assuming all goes well with your loan approval, you’ll close the loan and begin construction. The construction loan funds go into an escrow account to wait for dispersal to the contractor.
The contractor receives half the construction loan amount upfront and the other half upon completing the project. Additionally, the contractor must begin work on your renovation project within thirty days of the loan’s closing. In general, the entire project must finish within six months of the starting date.
Finance a New Home Build
Have you always dreamed of building a house in Eugene? If so, a construction-to-permanent loan is an excellent option. Basics of this kind of construction loan are similar to those of an FHA (203)k loan, with the difference being that you’re building the house from scratch.
Expect to meet stricter credit history and income requirements than would be necessary for other FHA loans. You’ll also pay at least 3.5% of the loan’s total value upfront as a down payment.
The lender will also have you pay for a mortgage insurance policy (MIP) at the start of the loan. Since it’s an FHA loan, the MIP continues throughout the life of the loan.
As with the renovation loan, you must use a licensed general contractor to build your home. The contractor should ideally have vast experience building first-rate homes as well as working within HUD guidelines.
Another critical thing to know about an FHA construction-to-permanent loan is that your new house must meet strict safety requirements. An appraisal happens when the construction is nearly complete to determine if the home meets the conditions necessary for the home mortgage aspect of the loan to close.
Lastly, an FHA construction loan is a fantastic way to finance your dream home. Whether you want to build a house or renovate an existing property, this type of financing makes creating your dream home doable.
The home loan officers at Strategic Mortgage Solutions excel at helping our Lane County clients finance their homeownership dreams. Contact us to learn more about FHA construction loans and other types of available financing options.