Also, don't make large purchases in the months before you apply for a construction loan. Most lenders usually want a minimum credit score of 680 to consider the loan, while some want the score to be 720 or higher. A lender would prefer to get a lower interest rate and have a lower-risk borrower because they know that they will recover the funds they lent to the borrower based on their previous history. Because construction loans are risky from the lender's point of view, interest rates are usually at least 1% higher than those of a conventional 15- or 30-year mortgage.
The same goes for credit scoring. If you're building a home, you should aim for a minimum credit score of 680. A better score is 700—720 to qualify for a construction loan. It's possible to get a loan with a lower score, but there must be specific extenuating circumstances.
An FHA construction loan is a mortgage that allows you to accrue the costs of building a home from scratch. The loan funds will be held in an escrow account and your contractor will be paid in installments as each construction phase is completed. One of the financing options you have when building a new home or remodeling is called a construction loan. Because construction loans are generally intended to cover the construction process, they are usually issued for a period of 12 to 18 months.
Fortunately, you can visit the U.S. Department of Housing and Urban Development (HUD) website to search for FHA lenders, although not all FHA lenders offer FHA construction loans. You can convert the costs of buying your own land, paying for construction, and covering the lender's fees into a single loan. Unless you pay for a home in cash, you first need a loan to build a home before you can grant a conventional 15- or 30-year mortgage for long-term financing.
If you can't find an FHA construction loan lender or don't qualify for this program, don't despair. Expect the interest rate you'll pay on an FHA permanent construction loan to be higher than other types of loans. Any remaining funds after construction is finished must go directly to the principal of your loan; you cannot keep them as a cash repayment. Construction loans can cover the costs of buying land, drafting plans, obtaining permits, and paying for labor and materials.
This can make the process more complicated than a traditional construction loan, but for those who work, there are real benefits. One of the main questions people have is what type of credit rating is needed if they want to get a construction loan.