Most people don’t have thousands of dollars in the bank to build their dream home, but that shouldn’t stop your dream from becoming a reality. While some lenders shy away from giving loans on homes that don’t exist yet, but there are options. One of which is an FHA construction-to-permanent loan.
What is the Construction-to-Permanent Loan?
When building your own home your builder will need funds to pay for the upfront costs of materials and labor. Rather than going through the headaches of a acquiring a construction loan and refinancing to traditional mortgage you can apply for an FHA construction-to-permanent loan. This means you will have just one application process, one approval, and one closing. While the build is in process the lender will give the funds directly to your builder. Once an occupancy certificate has been obtained the loan will automatically be converted to a regular FHA loan and you will begin making regular mortgage payments.
How Does it Work?
While not all FHA lenders offer this type of loan, many do, so your first step is finding the right lender for you. Once you have found the lender you can apply for a construction-to-permanent loan just as you would a normal FHA loan. You must provide proof of the following:
- A credit score no lower than 580 (although many lenders require a higher score for this type of loan because it is riskier for the lender).
- A debt-to-income ratio of no more than 41% after the loan has been granted.
- Steady employment history.
- Stable income.
- Proof of ability to cover the down payment and closing costs.
Who Will Build the Home?
Because you are borrowing the money, the FHA will have the final say on who you can and can’t hire to build your home. The first rule is, it probably can’t be you, even if you are qualified and licensed to do so. Most lenders will require proof that you also have the time and resources to build your home in a reasonable timeframe if you plan to do it yourself. In most cases the FHA will require you hire a licensed and experienced general contractor to complete the build.
What Do You Pay?
Standard FHA loans require a minimum 3.5% down payment and that is no different with a construction-to-permanent loan. You are however also responsible for the payments on the interest of the loan during the construction process. Once you move into the home will pay the principal and interest as you would with any other loan.
The FHA construction-to permanent loan makes it not only possible, but somewhat easy, to build the home you have always dreamed of!
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