Mortgage Rules Unique to Construction Loans

Building a home instead of buying an existing house can be a challenge, but the results are well worth the effort.

If you want to build a home on your own lot using a construction-to-permanent loan, also known as a One-Time Close mortgage or single-close construction loan, you should know that some home loan rules are different for construction loans than for existing construction mortgages.
For example, when applying for an FHA One-Time Close mortgage, there are land considerations. Are you planning to build on your own lot?

Or do you need to purchase land in conjunction with the mortgage? FHA loan rules in HUD 4000.1 state, “The Borrower must either be purchasing the land at the closing of the construction loan, or already own the land.”

FHA loan rules include prohibitions on approving FHA loans for unimproved land with no specific goal to begin constructing a home. In other words, when you apply for an FHA OTC loan, you’ll need to buy the land (where applicable) at the same time as you apply for the construction loan.

And when calculating the adjusted value of the home for purposes of establishing the loan amount, the lender is required to use either the appraised value of the property or “the documented Acquisition Cost to determine the Adjusted Value.”

HUD 4000.1 states that in such cases, “The maximum mortgage amount is calculated using the appropriate purchase Loan-to- Value (LTV) percentage of the lesser of the appraised value or the documented Acquisition Cost.”

The documented acquisition cost of the property calculation includes:

• The builder’s price (includes cost of land if being purchased from builder), or the sum of all subcontractor bids and materials (if land is already owned by the Borrower);
• Borrower-paid options and construction costs not included in the builder’s price to build;
• Closing costs associated with any interim financing of the land, and either of the following--the lesser of the cost of the land, or appraised value of the land, if the land is owned six months or less at case number assignment; or the appraised value of the land if the land has been owned for greater than six months at case number assignment, or was received as an acceptable gift.

When it comes to down payments for FHA OTC loans, there are options that those buying existing construction do not have. HUD 4000.1 advises that the borrower, “may utilize any cash investment in the Acquisition Cost of the Property or land equity to satisfy the Minimum Required Investment.”

The lender, in such cases, is required to fully document that the cash investment was properly sourced and meets FHA loan requirements for down payments.

Borrowers should expect to provide a letter explaining the source of such funds and providing copies (never originals) of supporting documentation such as deposit slips or other records that can help the lender see the sourcing of such down payment funds.

Want More Information About One-Time Close Loans?

We have done extensive research on the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.

OneTimeClose.com provides information and connects consumers to qualified One-Time Close lenders to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.

Please note that investor guidelines for the FHA and VA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.

Contact Us:  Send us your Request – Spam Safe

Please send your email request to [email protected] which authorizes OneTimeClose.com to share your personal information with one mortgage lender licensed in your area to contact you.
 
1.  Send your first and last name, e-mail address, and contact telephone number.

2.  Tell us the city and state of the proposed property.

3.  Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.

4.  Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your  debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $1,500,000 and review higher loan amounts on a case-by-case basis. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.