We appreciate the editor of Realty Times posting this on February 17th, 2023.
A growing number of people looking to purchase a home have come to the realization that existing inventory of houses currently on the market are in short supply. The discussion then turns to the possibility of having a brand-new custom home built from the ground up. Many believe they need large down payments to do so and are not aware that there is an FHA construction to permanent loan (3.5% down payment), which is offered by a small number of FHA approved lenders around the country. This loan is referred to as an FHA One-Time Close Construction Loan.
FHA Construction Loan Limits Just Got Higher in 2023
The FHA loan limits change annually based on a number of factors in the housing market. In 2023, the limits for all FHA forward mortgages (which includes FHA Single Close Construction Loans) increased and the floor and ceiling numbers were adjusted for single-unit properties as well as multi-unit purchases. This increase will allow more FHA borrowers to qualify for higher loan amounts to keep up with the increase in costs for both existing homes as well as building a new home.
If you want an FHA Construction Loan in 2023, the floor is $472,030 in America’s low-cost housing markets. The ceiling is $1,089,300 for high-cost areas. The FHA loan limit floor is 65% of the national conforming loan limit of $726,200 for a single-unit property.
Multi-unit loan limits are as follows: Two-unit: $604,400, Three-unit: $730,525, Four-unit: $907,900. You will find that loan approval from mortgage originators of multi-units is usually nonexistent and limited to single-unit, owner occupied properties with all borrowers needing a minimum middle credit score of 620.
For high-cost areas, FHA mortgage limits are established at 150% of the national conforming loan limit in 2023. One-unit: $1,089,300, Two-unit: $1,394,775, Three-unit: $1,685,850 and Four-unit: $2,095,200.
FHA One-Time Close Construction Loans feature the same general requirements as other FHA mortgages, including a low 3.5% down payment, no penalty for early payoff of the mortgage, and the ability to refinance later with an FHA Streamline Refinance loan that can result in a lower rate, a lower payment, or other tangible benefits to the borrower.
Another government agency, the Department of Veterans Affairs, has a True $0 down payment VA construction to permanent loan. This loan is referred to as a VA One-Time Close Construction Loan and unlike its FHA counterpart, has no maximum lending limits. However, eligible Veterans must have an acceptable debt-to-income ratio which refers to the percentage of gross monthly income that goes towards debts and the cost of the mortgage on the to be constructed home.
While the VA Guidelines are clear, lenders can impose “Overlays” which are additional requirements which are determined by each VA lender. The $0 Down VA construction loan limit maximum range varies by lender anywhere from $750,000 to $1,500,000, with all borrowers needing a minimum middle credit score of 620.
No Payments During The Construction Phase
The FHA and VA Construction Loans were designed for ease of use and not to be constraining on the borrowers. The guidelines will not allow the borrower to pay any interest costs during the construction phase of the loan. This interest is factored into the builder contract and paid for by the builder. That translates into the consumer paying no interest during the construction period with their first contractual payment starting the 1st of the month following a full calendar month after their construction is complete. This is a real advantage because the FHA or VA backed loan is structured so the borrower does not have to worry about making payments on their existing mortgage or lease as well as pay for the interest loan during the construction phase of the loan.
There is No Requalification of the FHA or VA borrower when the construction is completed. Upon initial approval of the construction loan commitment, the FHA / VA borrower receives underwriting approval on their credit as well as income & employment, bank statements and other qualifying items. Once the loan is subsequently closed and the construction is fully completed by the builder, both the FHA and VA lender does not require any requalifying items from the borrower. They simply sign additional documents and / or loan modification agreements and no second closing is needed. That is significant because the borrower does not have to pay for any fees which would be charged on a second closing. Also, there will not be another credit pull and no employment or credit underwriting reverifications are needed because they are not required. Prudent lenders qualify the borrowers at a slightly higher interest rate at closing in addition to securing an extended lock for the period needed for construction. When the construction is completed, the lender requires a note modification which allows the borrower to get an interest rate at the same or lower rate at which they were originally approved. The program guidelines state that the final note rate cannot exceed the interest rate at the time of qualification. In the rare instance where that may occur, the lender would require new verifications for credit underwriting.
“Demand for the FHA / VA One-Time Close Construction to Permanent Loan has risen due to higher demand for custom home construction. These programs are especially advantageous to both eligible Veterans and FHA borrowers because they only have one closing and avoid having to requalify for permanent financing after initially qualifying for the construction loan at the beginning” says Stuart Blend, Regional Sales Manager for Planet Home Lending, LLC, the correspondent division for Planet Financial Group, LLC. “These government sponsored programs saves borrowers time and money. Very few lenders around the Country know about this program and Planet Home Lending is extremely proud to offer our One-Time Close Construction products to our correspondent lenders as an avenue that includes our Veterans, allowing them to finance a new construction utilizing their hard-earned VA loan eligibility. There is no requalification of the borrower or recertification of the property value upon completion of the home. Mortgage payments do not begin until construction is complete.”
Finding an experienced mortgage lender for this type of FHA and VA construction loan financing is not an easy task. Most FHA and VA lenders concentrate on regular FHA / VA home purchases, cash-out refinances and streamline refinances. Only a select few companies around the nation employ loan officers who fully understand how to put these deals together and provide quality service throughout the process.
Our firm has 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 all 50 states and each company has supplied us with their product guidelines. Due to the difficulty in finding FHA and VA approved lenders who originate these low down payment government backed construction programs, we launched an educational website located at www.OneTimeClose.com. The site provides detailed product information for FHA / VA One-Time Close loans and complimentary connects consumers to (1) qualified One-Time Close lender licensed in their state.
If a consumer is serious about purchasing a lot, finding a local builder and has the passion in moving forward with the various steps necessary to get this type of loan, then the least we can do is point them in the right direction. The ability to build a brand-new house in 2023 with higher lending limits and little or no down payment is of great benefit to potential consumers wanting to do so.
Bruce Reichstein is the CEO of Warehouseline.com, a mortgage warehouse lender specializing in funding Government backed FHA & VA One-Time Close Construction to Permanent loans. Coming from a background of 30+ years in the mortgage banking industry including running a Nationwide VA Mortgage Origination company as well as being a former FDIC Bank Chairman for 12 years, Reichstein has concentrated his expertise and championed both the FHA and VA One-Time Construction Close programs for eligible borrowers Nationwide.
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