FHA Construction Loans

new construction with an FHA construction loanThe FHA Loan allows first-time home buyers and buyers with less-than-perfect credit the opportunity to build an affordable home. Hurst Lending & Insurance is proud to offer one-time-close construction loans able to be financed through the FHA Loan Program. Home buyers can now build the home of their dreams without worrying about not qualifying for financing due to poor credit history.

An FHA, or Federal Housing Administration, loan is a government-insured option for those usually unable to qualify for construction or home loans. With an FHA loan, buyers do not need a high down payment or a perfect credit score to be funded. In fact, down payments can be as low as 3.5% in properties with 1-4 units and credit scores need only be higher than 620, unless you are willing to increase your down payment.

Another benefit of the FHA loan is its ability to be assumed in the sale of your property. However, due to the low credit requirement and down payment amount, an FHA loan does require owners to carry mortgage insurance.

Our FHA construction loans offer:

  • Land, construction and mortgage in a single, low-interest loan
  • One down-payment of 3.5%. Conventional construction loans can require up to 30% down.
  • Easy qualification
  • Close once – no risk of becoming un-qualified during construction
  • Fees and construction phase interest can be rolled into the loan
  • No payments during construction

Now more buyers than ever can afford to build their dream home!

The History of the FHA Loan Program

The FHA Loan Program was established by the U.S. government in 1934 to help more Americans achieve the American Dream of becoming home owners. The Federal Housing Administration (FHA) insures these loans, making it less risky for lenders to offer loans to individuals who may have a short credit history or have hit some bumps in the road.  Therefore, buyers with less credit history or lower credit ratings can get loans with affordable rates and terms from lenders participating in the FHA loan program.

FHA loans are particularly popular with first-time home buyers because they are among the easiest mortgages to qualify for, and require a smaller down-payment than many other loans. Here’s what you can expect from an FHA loan:

  • Easier credit qualification – while minimum credit scores vary based on the exact loan requirements, borrowers typically need a credit score of 620 or higher to get the best rates.
  • Low down payments – as low as 3.5%, and the money can be a gift or a grant
  • Low closing costs

Buyers should consider all their lending options. While the rates and closing costs are appealing with an FHA loan, FHA borrowers must pay both an upfront mortgage insurance premium (commonly rolled into the loan) as well as a monthly mortgage insurance payment. A No PMI Loan might be a better option for some buyers.

Contact us for more information, personal quote or a personalized pre-qualification letter to go along with your purchase offer.

The Pros and Cons of an FHA Loan for First Time Home Buyers

FHA loans are a common option for first-time homebuyers who are unable to pay the percentage down required by conventional loans or haven’t built up the higher credit score needed to qualify. FHA construction loans, just like regular FHA home loans, offer first-time buyers relaxed credit score requirements and low down-payments while offering buyers the option to roll construction costs into a single FHA mortgage loan with a one-time close. To find out if an FHA loan is your best option, please contact us for more information and a personalized recommendation.

The following are a few pros and cons to consider when thinking about an FHA construction loan:

Pros

  • One-Time Close: With an FHA Construction Loan, first-time homebuyers with less-than-perfect credit can bundle land, construction, and a mortgage into a single, low-interest loan.  You only have to go through the closing process once and you will make no payments during construction.  With most other construction loan options, there is some risk that you will become unqualified for your permanent mortgage during the construction process, but not with an FHA construction loan.
  • Very Low Down Payment: The down payment for a FHA Construction Loan, just like a regular FHA home loan, can be as low as 3.5%. Comparing this low down-payment to the 20% down payment for a conventional loan or the 30% down payment needed for a conventional construction loan, the FHA loan option is clearly a more attractive choice for first-time buyers unable to pay high upfront costs. Additionally, down payments on FHA loans can be gifts or grants; an incentive allowing parents, family members, and friends to support the first-time buyers by gifting the 3.5% down payment for the loan.
  • Relaxed Credit Score Requirements: Depending on the exact loan requirements, applicants for an FHA home loan or FHA construction loan can qualify with credit scores as low as 620.

Cons

  • Private Mortgage Insurance (PMI) Requirements: FHA lenders do require home buyers to carry mortgage insurance. This involves an upfront cost, as well as monthly payments that will continue for the life of your FHA loan (unlike a conventional mortgage, where you can generally stop paying mortgage insurance when you achieve 20% equity in your home). The upfront payment can be rolled into the loan and typically costs 1.75% of the total loan amount. Once you have 20% equity in your home, you may be able to refinance from an FHA loan into a conventional loan to eliminate your monthly mortgage insurance payments (subject to your current credit status).  Whether this would be to your advantage would depend upon conventional mortgage rates at that time.  If you want to avoid mortgage insurance entirely, or have the ability to pay a higher percent down, there are no PMI loan options that may be a better fit for you.
  • FHA Loan Limits: The Federal Housing Administration does have limits on how much money you can borrow under an FHA construction loan or FHA home loan.  The limit on FHA loans varies by the county, or even neighborhood, in which the homebuyers are applying.  FHA loan limits may also vary from year to year.  The FHA sets a standard national limit, which was $625,000 in 2016, and provides upward limit adjustments for higher-priced areas. Contact us to find out how much you could qualify for with an FHA home loan or FHA construction loan.  If FHA loan limits present a problem for your purchase, our parent company, Hurst Lending & Insurance also offers low down-payment jumbo loans that may be appropriate for your situation.