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FHA Construction Loans – Real or Myth? FHA Construction Loans – Real or Myth?(1)

 

FHA Construction Loans vs the 203K Program

There is a common misconception that the “FHA construction loan” and the FHA 203 renovation loan are one in the same.  This is not true.  Many lenders will tell you they are the same because those folks do not know about the true FHA construction-to-perm program.  The true HUD sponsored FHA construction to perm program is different in that it allows for a completely new home to be built, either a traditional stick-built home, or, a brand new systems-built(AKA “modular) home.  This is also not to be confused with a traditional FHA end loan for a newly built home.  Some lenders will try and tell you they can do FHA loans for newly built homes but that is not the same either.  Simply providing an FHA loan for a just-completed home is much different than a true construction-to-perm loan where by the land is acquired at initial closing with this loan, then draws are make to the builder as each phase of construction is complete.  This is a true construction-to-perm loan, not just an FHA loan that acts as the “end loan”.

FHA Construction Loans – The Benefits

Many folks ask why its so hard to find a bank that will even offer construction loans these days.  There are a number of reasons why construction loans are viewed as being high-risk these days but perhaps the most important one is the appraisal issue.  Because of the turbulent real estate market we are in right now, if you were to get conventional construction-to-perm financing from a bank and your builder begins construction of your home, the property might very well be worth less in just the short 5 months it takes to complete the home!  This is possible these days due to poor home sales in the same area negatively affecting the current value of your home which is still under construction.  To overcome this, the FHA construction home loan program is a 100% true “single close” transaction.  This means that there is no 2nd appraisal at the end, no re-qualifying the borrower, no re-pulling the credit report, and no re-verifying employment.  Once the initial closing is complete, the borrower is essentially out of the equation until the builder finishes the home.  You can use this loan to build your next dream home, and it works great with small builders as well as any of the big “track builders” such as Toll Brothers, Ryland, Pulte, D.R. Horton, and William Ryan Homes just to name a few.

What Banks offer FHA Construction Loans?
As you may have discovered already, very few banks offer the true FHA construction loans.  This is because significant infrastructure is required to facilitate these unique construction mortgages including the draw center, construction/builder underwriting dept, and more.  Also, the bank must be willing to lend their own funds during the construction phase and up until the home is complete, which very few banks are willing to do.  Still, there are a couple good banks out there who specialize in this program.  One of which is Joe Karns at Bridgeview Bank.

Author Joe Karns of Bridgeview Bank is a seasoned mortgage professional dedicated to bringing his subscribers relevant and useful information on how to compare construction lenders. Want a free construction loan consultation?   Check out Joe Karns at the following link for FREE expert advice on helping you source the best FHA construction loans.

New Home Construction Loans – Where Do I Start? New Home Construction Loans – Where Do I Start?(1)

New Construction Loans – Where Do I Start?

For many folks wanting to design and build their new dream home, this may seem to be a daunting undertaking which is why many ultimately end up turning to one of the big “track builders” such as Toll Brothers, Pulte, and the like. What makes many folks nervous is that they simply don’t know where to begin in the construction process and specifically the sourcing of new home construction loans. When in search of the best construction loan program for your particular project, its important to consider the following:

New Construction Loans – Method of Building:

The first aspect of choosing new construction loans should be what your method of construction will be. “Method?” you may ask? Yes, there are two primary methods of construction these days and they each have pro’s and con’s. Traditional “stick-built” construction is what most are familiar with. This method of construction allows for the greatest amount of customization however traditional 100% site-built projects are at the mercy of the weather and in some cases cost over-run concerns. The second option which is becoming increasingly popular is off-site home construction, also known as “modular home construction”. There is often a misconception that modular homes are built to lesser quality simply because they are built in blocks at a factory and then delivered and assembled at the construction site. The reality is quite opposite. In fact, both homes are built to the same local building code and due to the modular homes being built mostly indoors, they usually end up being built tighter and straighter than their site-built counterpart. The only downside of modular built homes is that they are somewhat limited in regard to extensive customization, however there are usually more floor plan options within modular homes and technology continues to further this initiative. Regardless of square footage or desired elevation of your dream home, you should consult both types of builders with your plans/specs to compare their offerings and prices.

New Home Construction – What’s Your Timeframe?

When considering lenders for new construction loans, its important to first consider how long your builder expects it to take to finish your home. Because of current restrictions on lending guidelines, many banks will frown upon the construction phase taking more than 6-7 months. This is primarily due to Fannie Mae’s unwillingness to allow for construction terms longer than 9 months. Also, a bank’s greatest exposure for things to go wrong is during construction therefore many try to mitigate their risk by putting a cap on the number of months any home can be under construction. A general rule of thumb for this aspect is: the longer you expect your home to be under construction, you better be that much more well-qualified in regard to income, assets, credit scores, and down payment. Its important to keep in mind that the average 2400 square foot two story home would take about 6 months to complete, where as its modular-construction counterpart would only take half the amount of time to construct.

New Construction Loans: Construction-to-Perm vs. Construction + End Loan:

There are two main types of construction loans. The first is a single-close transaction known as a “construction-to-perm” loan because both the construction loan and permanent fixed loan are wrapped into the same mortgage application and closing. Other banks prefer the other type of new construction loans which is a construction line of credit followed by a refinance of that into the permanent fixed end loan once the home is finished. A risk of using a two-time close is that you must re-qualify for the end loan once the home is complete and there also needs to be a 2nd appraisal which often may come in short due to today’s turbulent real estate market.

The only true single-close construction loan is the FHA construction loan. This type of government insured construction-to-perm loan is rare but very powerful as there is absolutely no re-qualifying upon home completion nor is there a second appraisal.

In conclusion, it is important to take the time and carefully consider the many aspects of choosing new construction loans as well as the experience of the construction lenders who offer them.

Author Joe Karns of Bridgeview Bank is a seasoned mortgage professional dedicated to bringing his subscribers relevant and useful information on how to compare construction lenders. Want a free construction loan consultation?   Check out Joe Karns at the following link for some FREE  expert advice on helping you source the best new construction loans.

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