FHA home loan options are not limited to existing construction housing. FHA borrowers, including first-time home buyers, have the option to apply for a FHA One-Time Close Construction loan. This allows any borrower who financially qualifies to have a home built for them from the ground up.
FHA One-Time Close loans have some basic requirements; some of these are FHA loan program rules, but others are unique to an individual lender. For example, FHA One-Time Close mortgages, also known as FHA OTC loans, technically allow a borrower to build a home with more than one unit.
But many lenders may restrict these mortgages to single-unit properties. Or they may not permit the financing of certain closing costs, require higher FICO scores, etc. Much depends on the rules of the specific financial institution, so you will need to shop around for the right FHA lender for your needs.
FHA One Time Close mortgages also technically allow the borrower to act as her own contractor. Here’s what HUD 4000.1 has to say on that issue:
“The Borrower must have contracted with a builder to construct the improvements. The builder must be a licensed general contractor. The Borrower may act as the general contractor, only if the Borrower is also a licensed general contractor. “
However, lender requirements often state that the borrower is NOT permitted to do this, so if you want to act as your own contractor you must shop around for a participating FHA lender who will permit it.
There are other caveats to this; HUD 4000.1 instructs the lender, “The Borrower may not receive cash back from the additional equity in the Property, but the Borrower may replenish their own cash expenditures for any Borrower-paid extras over and above the contract specifications and any out-of-pocket expenses not included in the builder’s price. The Mortgagee must obtain an itemization of the extras and expenses and the cost of each item.”
Reading between the lines, some borrowers may interpret this as a set of rules designed to prevent cash back to the borrower except in the form of refunds, the same way as other FHA forward mortgage transactions are designed to prevent cash back at closing time.
An FHA One-Time Close Construction Loan can be an excellent investment if the borrower is not in a hurry to get the construction project finished and can invest the extra funds required to hire an architect and pay for other construction loan expenses.
It may be true that a construction loan costs more than the purchase of an existing construction home, but the results are worth it for those who want a home built to suit rather than trying to find just the right existing construction home.