While traditional lenders may require between 10 and 20 percent down on a construction loan, FHA loans only require 3.5 percent down. This makes buying a home much more accessible to individuals with limited financial resources.
The first step in applying for an FHA construction loan is to find a lender that is approved for FHA loans. Not all lenders offer FHA construction loans, so it is important to research possible options before selecting a lender. Potential borrowers may also need to meet certain credit qualifications to be eligible for a loan.
Once a lender has been selected, the borrower should obtain a copy of their credit report from all three major reporting agencies: Experian, Equifax, and Transunion. It is important to review the report thoroughly and make sure there are no errors or discrepancies. The information on the report will be used by the lender to determine if the borrower is eligible for the loan and what interest rate they can offer the borrower.
Next, the borrower must complete all the paperwork associated with the loan application and attach all necessary documents. This may include a copy of the borrower’s driver’s license, a copy of the social security card, proof of income, and other items. Once the application has been completed, the lender will review it and determine if the borrower is eligible for the loan.
If the borrower is approved, the next step involves obtaining a certificate of occupancy. This document verifies that the newly constructed home meets all local building codes and requirements. The certificate of occupancy must then be submitted to the lender as part of the loan process.
Once the certificate of occupancy has been approved, the lender will order an appraisal to determine the home’s value. Depending on the outcome of the appraisal, the loan amount may have to be adjusted based on the appraised value. After the appraisal, closing costs associated with the loan will need to be paid.
Finally, once the closing costs have been paid, the borrower will be able to begin building their home. Normally, the loan will be disbursed to the borrower in 'draws' as each stage of construction is completed. During this time, the lender will inspect the property to ensure that all of the conditions of the loan are being met.
In summary, FHA construction loans are a great option for individuals interested in building a home but have limited financial resources. To qualify for an FHA construction loan, borrowers must select an approved FHA lender, provide proof of income, and have a good credit score. Borrowers must also obtain a certificate of occupancy and have the property appraised. The loan is typically disbursed in draw payments throughout the duration of the construction process.
This article was contributed on Jan 01, 2024
