To reduce their risk, lenders require borrowers to have a credit rating of 680 or higher in order to qualify for construction. The FHA permanent construction loan combines the features of a short-term construction loan with a standard long-term FHA loan. It will close once and the loan will automatically become your permanent mortgage when construction is finished. According to Rodríguez, the credit underwriting of a construction loan is usually the same as that of a traditional mortgage, although it may take a little longer to close because there are several parties involved and it is subscribed subjectively based on future value.
The requirements for an FHA construction loan are almost identical to the requirements of any other FHA mortgage. Construction loans usually have higher down payment requirements and higher interest rates compared to a traditional mortgage. This can make the process more complicated than a traditional construction loan, but for those who work, there are real benefits. Any remaining funds after construction is finished must go directly to the principal of your loan; you cannot keep them as a cash repayment.
Because construction loans are generally intended to cover the construction process, they are usually issued for a period of 12 to 18 months. The advantage of financing major renovations with a construction loan, rather than a personal loan or home equity line of credit, is that you'll generally pay a lower interest rate and have a longer repayment period. The type of construction loan that's right for you will depend on your location, credit score, down payment, and homebuilding goals. However, lenders who offer FHA new construction loans are not easy to find and can be difficult to qualify for.
Construction loans are short-term, higher-interest rate mortgages that cover the cost of building or renovating a home. However, the builder you select must be willing to work with the FHA construction loan program (“not all builders will, Mushlin says). Construction loans can cover the costs of buying land, drafting plans, obtaining permits, and paying for labor and materials. An FHA construction loan covers all costs associated with construction, including land, plans, permits, fees, labor and materials.
If you can't find an FHA construction loan lender or don't qualify for this program, don't despair. The loan funds will be held in an escrow account and your contractor will be paid in installments as each construction phase is completed.