October 10, 2013
EDITOR’S NOTE: This article was written before changes to FHA loan rules made the old FHA Lender’s Handbook referenced in this article obsolete. The new FHA Single-Family Home Loan Rules are found in HUD 4000.1 and there have been many updates and changes to FHA home loans including One-Time Close Construction mortgage rules.
Learn about the most up-to-date information on FHA Construction loans for borrowers who want to build on their own lot.
——-
(The information below is no longer up-to-date, but we retain the original article here for archival purposes.)
A reader asks, “I am looking to move back home, to where my grandma resides. her home of 45+ years is in disrepair. I filed bankruptcy two years ago, the one where you dont make trustee payments. My question is I would like to demolish her house and rebuild a new one in its place.”
“I would be a first time home owner and I have been at my current job for two years with stable income. My wife is currently on long term disability with a pending social security claim. My end goal would be to demolish her house and build a completely new one in its place for us to all reside in. As this would require me to move to another state. My job would not be able to go with me. So 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.”
There is a lot to this reader question. The bankruptcy issue would have to be addressed by the lender as the FHA Back To Work program may permit some borrowers who have had recession-related financial difficulty to apply for an FHA loan even with negative credit information on the credit record (that may not reflect the borrower’s actual ability or willingness to repay the loan).
The employment issue is a tricky one–the lender would have to make a case-by-case determination to see if the borrower qualified for a home loan based on circumstances, skills and the ability to maintain new employment.
The one portion of this reader question we are able cover in detail relates to FHA loans for building on land the borrower already owns. According to HUD 4155.1, Chapter Two, the FHA does allow new purchase loans for single family homes when the borrower wants to build on his or her own land:
“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.”
Additionally, FHA loan rules in this chapter address issues related to equity and Loan To Value limits. When it comes to LTV, FHA loan rules say, “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.”
We’ll cover the LTV and equity issues related to this reader question in our next blog post.
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.
Browse by Date: