The Basics of FHA Construction Loans

Are you building a house or planning to purchase a fixer-upper? If you are, then you’re probably already looking at the FHA construction loan.

Texas construction loans

Mortgages that are backed by the FHA or Federal Housing Administration are excellent choices. They are especially beneficial for households with moderate income. Why? Because they have lower standards of income and credit scores compared to conventional home loans.

What is the FHA construction loan?

The U.S Department of Housing and Urban Development guarantees certain loans that are issued by approved mortgage companies through the FHA loan. This insurance protects lenders against borrowers defaulting on their payments. Consequently, banks and other financial institutions can offer loans with less stringent requirements to families with limited means.

For FHA construction loans, the mortgage closes before the project breaks ground. The funds will then be deposited into an escrow account and are disbursed by the lender at different stages after due inspection.

What are the advantages of the FHA construction loan?

  • Credit score

Compared to the traditional FHA loan, FHA construction loans have relatively higher standards because it is riskier on the side of the lender. However, the required credit score can still be considered lower than most mortgages. To qualify for the loan, you must have at least a credit score of 680.

  • Down payment

Like most FHA loans, the construction loan only demands an upfront payment of 3.5% of the property’s total value. This is already a bargain, as most mortgages need down payments ranging from 5% to 20% of the home’s purchase price.

  • Debt-to-income ratio

The FHA construction loan is an ideal option for people with a high debt-to-income ratio. The FHA-backing allows lenders to be more flexible with their guidelines. With most loans, the ideal debt-to-income ratio is 38% to 40%. With the FHA construction loan, that can be extended up to 50%.

  • Interest

Another benefit of the loan is its shorter interest term. With the FHA construction loan, you only have to pay for the interest during the construction phase of the property.

While FHA construction loans are very appealing for those who want to build or renovate a house,  very limited lenders offer this type of credit due to the complexity of its nature. Those who are bent on going for an FHA construction loan can search for mortgage companies who offer the program. If you are a resident of Texas, you can look for construction loans in Texas to get a better insight into the features and stipulations of the loan.

Other alternatives…

In case you have a hard time locating lenders who offer FHA construction loans, a suitable option would be the FHA 203k loan. This type of loan is a one-time-close: it lends you money for the purchase and renovation of the property. It’s like two loans in one. Moreover, it adheres to the same low-credit-score and low-down-payment requirements common to FHA loans. And one more important thing: most mortgage companies cover the 203k loan so you won’t have a hard time finding a lender that will finance your mortgage.

by jkyle