When you’re approved for a Federal Housing Administration (FHA) backed mortgage loan, you may use the money for a traditional home purchase or for new construction. If you’ve dreamed of building your own home on a piece of land, an FHA loan can help make that possible.
What an FHA Loan Is
The Federal Housing Administration (FHA) insures approved loans. Once the FHA approves an applicant, the borrower can apply for mortgage products at FHA-approved private lenders. Their mortgage is then government-backed. This makes the borrower a better bet for the lender, and so the lender provides better terms than they would have for a conventional home loan.
These loans are especially popular with first-time home buyers. When you have a government-backed mortgage insured by the FHA, you can seek loan approval with a lower minimum credit score and/or a lower minimum down payment than would be required with a conventional mortgage loan.
In exchange for the benefits of an FHA loan, borrowers must pay FHA mortgage insurance. The upfront premium will need to be paid at closing and will cost 1.75% of the total loan amount. If the loan was for $100,000, this would mean that you owe $1,750 ($100,000 x 1.75% = $1,750).
Using an FHA Loan to Build Your Own Home
The FHA offers two different options for construction. The first option is a 203(k) rehabilitation mortgage. This is meant for people purchasing a fixer-upper where a lot of repair work requires financing. When you’re building your own home, you want to apply for a construction-to-permanent FHA-backed mortgage. These are also called “one-time close construction loans”. This is the FHA-loan type for new construction.
With conventional construction loans, the financing process usually happens in multiple parts. First, the construction is funded through a construction loan. Later, a second application and approval process happens for a mortgage loan. The FHA-backed “one-time close” construction loans have the distinct advantage of being a two-for-one deal, covering both construction and the mortgage with one loan. Your mortgage closing will happen before construction begins. This means you only pay closing costs once and you only have to go through the approval process once.
You’ll need to meet a few requirements to be qualified for an FHA loan. Some of the FHA mortgage requirements include a FICO score of at least 3.5%, a debt to income ratio below 43%, and a steady income history.
Specifically for an FHA-backed construction mortgage, you’ll need to meet a couple additional requirements specific to this loan type. First, you’ll need to contract with a licensed general contractor. Then, you’ll need to have purchased land. This must happen by the time the loan closes, or you must have owned it for six months or less at that time.
The Benefits of Using an FHA Construction Loan
- Your down payment will be lower. Sometimes it can be as low as 3.5%.
- Depending on the details of your situation, it may be acceptable to have a higher debt-to-income ratio than with a conventional mortgage.
- A lower credit score can be acceptable.
- You only apply for one loan and pay closing costs once instead of a split construction and mortgage process. This saves time and money.
Why Build a Home in Utah
When you’re considering financing options, also consider where you want to live. One factor in that decision is finding a place that has a lot of value. It needs to be a place where you will feel it was worth spending the money to live there and that your family enjoys. It should also be a place where you get the most for your dollar.
Utah can be a great place to live. If you can accept the hot summers and the cold winters, then you will enjoy the benefits of a state with a low crime rate, lots of job opportunities, and a low cost of living.
Some of the country’s best national parks are in Utah, like Zion, Arches, and Bryce Canyon, making this a great place to live if you love hiking or taking your family on outdoor adventures.
New home construction is common enough in Utah that it will make the process easier.
The cost to build a house in Utah will vary depending on what features you’re looking for. An average cost per square foot, for a basic construction, is approximately $126, with a range of $101-$151 per square foot.
An FHA Loan Versus Alternative Options
Your first alternative option is to use a conventional loan instead of an FHA-backed mortgage. One of the biggest reasons borrowers choose to use FHA loans for new construction instead of independently seeking a conventional loan is that a conventional construction loan is known for being difficult to get. You will need a larger down payment, a higher credit score, and a solid income history. Your debt-to-income ratio will also need to be lower than it would be with an FHA-backed mortgage.
For military families, there is also the unique option to build a home with a Veterans Affairs (VA) loan. A VA loan is issued by private lenders and is backed by the U.S. Department of Veterans Affairs. This loan type is available for qualifying veterans, current military members, and surviving spouses.
The perks and options with a VA-backed loan for new construction are similar to FHA-backed mortgages.
The VA loans are also one-time closing loans, so you would only need to go through one process to cover construction and the mortgage. These loans are also available to borrowers with lower credit scores, higher debt-to-income ratios, and require lower down payments, similar to the FHA loans.
If you are eligible for both FHA and VA mortgage loans, you should discuss your local options with a mortgage loan officer. They will be most up to date on which option will offer you the best rates. Interest rates vary by location and the timing of the market. While one option may be better for one borrower, it may be different for someone else, and the answer may be different six months from now. Also keep in mind that the rate they will offer you will vary from one financial institution to the next. Shopping around for a mortgage is a good idea, no matter what type of mortgage product you decide to pursue.
Financing the Construction Of Your Dream Home
An FHA-backed mortgage is one solid option for mortgage financing, especially for first-time buyers, people with a lower down payment, and those with lower credit scores.
A borrower looking to build their dream home has many financing options available to them. Researching your options and shopping around is the best way to save yourself money down the line.