In addition to new purchase home loans and refinance loans, a borrower’s options for a mortgage also include loans that allow money for home improvements, renovations, and even construction.
Know your FHA loan options before you choose a type of property or the kind of loan you seek. There are many ways to get additional funds to fix, rehab, or even build a home from the ground up.
FHA New Purchase Home Loans
There is an option with most FHA mortgages including new purchase loans that allows added funds for the purpose of buying and installing energy-efficient upgrades to the home. No matter what type of FHA mortgage you want, ask the lender about the FHA Energy Efficient Mortgage option which allows up to $6,000 or more depending on the project, credit qualifications, and other factors.
FHA Energy Efficient mortgages can also be used in nearly any of the loans mentioned below, but lender requirements and other factors may affect these transactions.
FHA One Time Close Construction Loans / Single Close Construction Loans
The FHA One Time Close construction loan / Single Close construction loan, also known as a construction-to-permanent loan, allows borrowers to have a home built for them from the ground up. Construction loans may require, depending on the lender, higher FICO scores than other types of loans, but many borrowers find the freedom to choose designs and layouts to be a very important part of the home buying process and prefer to have a house built.
Construction loans require the use of escrow, and depending on the length of the construction phase the borrower may need to discuss how the loan will properly amortize since mortgage payments won’t begin coming due until after the construction phase is complete.
Such arrangements may very lender to lender, but the most important thing for the borrower to know is that regardless of when the loan starts being paid, it must be paid off within the loan term.
If there is a one year delay from closing to occupancy and the mortgage payments begin after that year is over, there will either need to be an adjustment in the monthly amount due, or a discussion with the lender about alternative means to pay off the loan within the original term.
Construction loans come in both standard “two close” versions requiring two applications and closing dates-one for the construction loan and the other for the mortgage loan itself. Ask your borrower about the One Time Close construction loan option, it may be a big advantage over the “two close” construction loan option.
FHA Rehab Loans
FHA rehab loans are designed especially for borrowers who want to to rehab, repair, or renovation work on an existing property. These rehab loans come in two basic types-a standard loan for large projects and a limited rehab loan for smaller rehab applications. Rehab loans are also available for those trying to repair or replace a home in a federally declared disaster area.
FHA Cash-Out Refinance Loans
The money from FHA cash-out refinancing can be used for any purpose acceptable to the lender including home improvements. If you are interested in cashing in on the value of your home to free up money to make home improvements, ask your loan officer about cash-out refinancing as an alternative to other types of loans-especially if you have a project that isn’t big enough to apply for a standard FHA rehab loan.