Will Post-frame Homes Qualify for FHA Financing?
Reader BRUCE in HOMELAND writes:
“Will post-frame homes qualify for FHA financing? I’m thinking about moving to North Dakota, where our daughters are, so question would apply for there. I am not interested in building one here in California, too many regulations and fees. I have been a contractor for 30 years. Thank you.”
Mike the Pole Barn Guru responds:
After spending half a day reading every FHA and HUD document I could Google, I am finding no exception disallowing fully engineered post-frame construction for FHA loans.
Federal Housing Administration (FHA) construction loans allow you to finance new home construction from ground up. Like standard FHA mortgages, these construction loans are government backed. Due to this, you can typically qualify for these loans with a lower credit score than you’d need when applying for standard, short-term construction loans.
You’ll need to meet certain requirements, though, to take out an FHA loan. And depending on work you’re doing, you might need to meet with a loan consultant to make sure your construction project meets FHA construction loan guidelines.
A construction loan differs from a traditional mortgage as you use this loan type to fund new home construction. A traditional mortgage is instead used solely to purchase an existing home.
An FHA construction-to-permanent loan covers buying land and building a home costs. Then, once your home construction has finished, your lender converts this construction loan to a permanent loan. You’ll pay this permanent loan off like you’d pay off any mortgage loan: making monthly payments, with interest, until you pay off loan’s principal balance.
You’ll only go through closing process once on an FHA construction-to-permanent loan. This is a plus: Closing costs can be pricey, running from 2% – 6% of total amount you’re borrowing. Going through more than one closing, then, could significantly increase your costs.
An FHA construction-to-permanent loan starts as a short-term construction loan. Under FHA rules, your lender must approve contractor you have chosen to build your home. Once this happens, your lender will draft a draw schedule based upon estimated construction process. With each draw, your contractor will be paid so construction on your home can continue.
Once your home’s construction is done, your lender will convert this short-term construction loan to a permanent mortgage, usually with a term lasting 15 to 30 years. You’ll then make regular monthly payments until you pay off this loan.
How Does A One-Time Close FHA Construction Loan Work?
Ready to apply for an FHA construction loan, here’s what you can expect.
- Get Preapproved For A Mortgage
During preapproval process, a mortgage lender will review your credit and verify your income to determine how much money it can loan you. Getting preapproved is a key step in FHA’s lending process: It lets you know how much you can afford to spend on building a home.
During this process, your lender will check your credit report and credit score. To qualify for an FHA loan, you need at least a 500 FICO credit score. Be aware, though, many lenders won’t approve you for a mortgage unless your score is higher, often 580 or higher.
Lenders will also review your finances and require you to provide copies of such key documents as your two most recent paycheck stubs, two months of bank account statements and last two years of your tax returns.
- Select A Plot Of Land
You’ll have to select a plot of land. Make sure this land meets FHA requirements. For example, you can’t take out an FHA construction loan if your land sits near an oil or gas well, is too close to an airport or is near an area likely to suffer from floods.
- Close On Your Construction Loan
In many ways, applying for an FHA construction-to-permanent loan is much like applying for any mortgage loan. Your lender will review your credit report and credit score.
This process does differ in some ways, though. For a construction-to-permanent loan, you’ll first close on a short-term construction loan only lasting while construction is taking place. Once construction is over, your lender will convert this loan to a standard primary mortgage. You can choose your new loan term – two popular choices are 15 and 30 years – and begin making monthly payments, with interest, until you pay off your loan.