FHA Construction Loans Deserve Your Attention
9.1.16 – Although we accept these programs we currently do not have any recommended lenders for FHA and VA loans.
As the landscape of our market changes (it used to be, even without ownership of the land, a client could obtain 100% financing) we need to be prepared to deal with new realities our clients can face. With that in mind, we have been testing (6.1.2013) a FHA program specialized for construction. The FHA OTC (One Time Close) program is a very useful tool for us as it’s identical to a regular FHA loan in every way except for one; the house isn’t built yet. The benefits over a normal conventional construction loan are numerous and a few of the highlights are listed below;
- 3.5% down payment-As the builder, we collect at the time of ordering the home a “Processing Payment”, it gets the ball rolling, and can apply to the 3.5% needed for the FHA loan program.
- Credit (FICO) scores can be as low as 620 and still qualify
- Much more flexible job/work history requirements (it just needs to make sense)
- Debt-to-income (DTI) ratios up to 50% (although the Dodd-Frank Act is going to lower that eventually)
- Small reserve requirement –just 2 months PITI (Principle Interest Tax Insurance) post closing
- Gifts are 100% allowable for the required down payment and/or closing costs. This can include cash or equity in a lot just to name a few examples. All normal FHA guidelines apply where gifts are concerned. For instance, it can come from a family member, but it can also come from a friend who is “like” family where a long-standing relationship can be proven.
Other quirks of the program
- Max loan amount $417,000, even if the county max is higher for the FHA in that particular county (i.e Pierce and King county FHA loan limits are 500k) so the max TAC (total acquisition cost) is $432,125 (432,125 x .965 = 417,000). Now, that doesn’t mean that a borrower couldn’t do a $445,000 build, they would just have a required down-payment a bit higher than 3.5% is all.
- Loan closes up front, just like any other FHA loan, so the borrower is never re-qualified. This is huge as nothing can happen to the borrower in the sense of loan qualification which could derail the loan at the end of the build. Once we are closed up front, the borrower never has to worry about not being qualified.
- 6 month time frame from the start of construction to modifying the loan for repayment – that means the house built should not exceed 150 days or less.
Because all of the above is true of the program, it does require a close collaboration between the buyer, builder, and lender. Ideally, we want to wait until the absolute last moment to fund the loan, because that’s when the timer starts. So, in order for the loan to close, we need several items (IE all the bids from the builder, and all the cost associated with the rest of the home be it excavation, permit cost, port-a-potty cost etc) all in and added to the final bid. This is what needs to take place in any case with any construction loan, so we are not re-inventing the wheel. However, the cost of obtaining the builder permit cannot be funded by the loan, because again, that would start the loan timer. So, we see it happening like this.
Client orders home after getting pre-approved for an FHA loan. We get the plans submitted to the county, which in most cases requires only a processing fee of no more than $3,000 dollars for most counties. Again, that Processing Payment can be applied towards the required 3.5% down. So, our processing fee from you (the client) when you order the home, will also include the fee needed to submit for your building permit, and or any other processing fee that might be needed for your project. Every project is a little different, so the amount needed when you order the home will change due to other factors.
If you have land or are buying land, we can help with obtaining, and under the FHA guidelines, we are required as the builder to obtain the bids and estimates for all other items pertaining to the home/land construction. Now, as a result of doing the entire scope of the work, and being responsible for any cost over runs, True Built Home will mark up in and all bids, depending on the nature of the bid, 15-20%. Once all the bids have been collected we can set a final build cost. Of course, the county permit is processed and the lender is working on the loan to make sure all the loose ends are tied up.
Once the county calls and lets us know the permit is complete and the lender has given loan approval and is ready to close the loan, we can then have a preconstruction meeting, schedule the excavator for the dig out (he can’t do anything on the land, unless it is the ownership of the clients already, until the loan funds, and the first thing that is done is the land is paid off) and give the lender the green light to fund the loan. That is when the project timer starts and we have 120-150 days to finish the home.
- The land is paid for at the close of the loan
- The excavator moves in to do the dig-out(generally a day or two)
- TBH has already ordered the lumber, foundation steel and concrete
- From here things move towards completion.
When the house is finished, there are a few modification papers to be signed which will change the loan from the construction phase to the repayment phase, and then you are ready to move into your new home!