January 28, 2016
A reader asked us a question recently in the comments section about FHA new construction loans: “My husband and I will be building a home, we have land that we are interested in, what is the max for a construction loan and build that FHA gives?”
To be clear, the FHA itself does not issue loans–the borrower must find a participating FHA lender willing to offer a new construction loan. When it comes time to determine the maximum loan amount for new construction mortgages, the FHA loan rulebook has specific instructions for the loan officer.
How does the FHA instruct lenders to determine the maximum mortgage amount in these cases? According to HUD 4000.1:
“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 LTV percentage means that the borrower is responsible for making a minimum down payment of 3.5%–that amount could be higher depending on the borrower’s credit score and/or other factors.
What does the documented Acquisition Cost include? According to HUD 4000.1:
“The documented Acquisition Cost of the Property includes:
–the builders price to build;
–Borrower-paid extras over and above the contract specifications and/or out-of-pocket expenses not included in the builders price to build;
–cost of the land if already owned, or with an acceptable gift documentation, the appraised value of the land may be used instead of the cost; and
–closing costs associated with any interim financing of the land.”
Furthermore, “If the land is being purchased from the builder, the cost must be included in the builders price to build. If the Property being constructed is Manufactured Housing, the builders price to build shall include the sum of the cost of the unit(s) and all on-site installation costs.”
As with any other FHA mortgage loan, the lender is required to fully document and approve all sources of down payment funds for a new construction loan. An escrow account may be required and there are other factors that may apply for a new construction loan that other types of FHA mortgage loans don’t require. Speak to your loan officer about the details of a new construction loan and that financial institution’s rules for this type of home loan.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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