October 10, 2013
A reader asked us recently about FHA loans for building on land the borrower already owns: “…My end goal would be to demolish (the original) house and build a completely new one in its place for us to all reside in…what I am wondering is does this kind of demolish and rebuild qualify for FHA loans and with me having to move to do this what kind of eligibility would I have for FHA loans.”
The rules for FHA loans where construction would happen on land the borrower already owns can be found in HUD 4155.1, Chapter Two. FHA loan rules allow new purchase loans for single family homes when the borrower wants to build on his or her own land. According to Chapter Two,
“A borrower is eligible for maximum financing if he/she
- acts as a licensed general contractor and is building a home on land that he/she already owns or acquires separately, and
- receives no cash from the settlement.
When building on a borrower’s own property, the appropriate loan-to-value (LTV) limits are applied to the lesser of the appraised value of the proposed home and land, or documented cost of the property. The documented cost of the property includes the
- builder’s price, or sum of all subcontractor bids and materials
- cost of the land (if the land has been owned more than six months or was received as an acceptable gift, the value of the land may be used instead of its cost), and
- interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property.”
What about FHA loan-to-value limits on these loans? Chapter Two states:
“When building on a borrower’s own property, the appropriate loan-to-value (LTV) limits are applied to the lesser of the appraised value of the proposed home and land, or documented cost of the property. The documented cost of the property includes the:
- builder’s price, or sum of all subcontractor bids and materials
- received as an acceptable gift, the value of the land may be used instead of its cost), and
- interest and other costs associated with any construction loan obtained by cost of the land (if the land has been owned more than six months or was the borrower to fund construction of the property.”
FHA loan rules also address the issue of equity built up in the borrower’s land. Does the equity in land itself factor into the FHA loan at all? And does this mean there can be cash back to the borrower at closing time under the right circumstances? According to Chapter Two:
“Equity in the land (value or cost, as appropriate, minus the amount owed) may be used for the borrower’s entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85% of the appraised value.”
“Replenishing the borrower’s own cash expended during construction is not considered “cash back,” provided that the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds used for construction.”
For more information on these issues, speak to a loan officer or contact the FHA directly.
Do you have questions about FHA home loans? Ask us in the comments section.
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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