December 4, 2020

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FHA Implements New Construction Loan Rule Changes

The FHA One-Time Close Construction Loan: An Option In 2020

The FHA has announced rule modifications for its new construction loans.

On October 22nd, 2020, the FHA and HUD issued a Mortgagee Letter detailing modifications made in 2018 and 2019 which have resulted in a need for further alterations of the rules for New Construction loans.

Some of the changes end requirements for “Early Start Letters” and other requirements, others make provisions for “alternative inspections” as we’ll discover below.

The FHA/HUD official site states there are also changes to the maximum financing policy for FHA New Construction loans. Effective immediately–lenders can choose to wait on implementing these modified rules until January 4, 2020, but have the option to start using the new rules now if they so choose) the following modifications are being added to HUD 4000.1:

  • Eliminating Early Start Letter requirements
  • Eliminating pre-approval requirements;
  • Consolidation of requirements regardless of loan-to-value;
  • Including Form HUD-92544 Warranty of Completion as a requirement for all New Construction; 
  • Providing alternative inspections by a third party, who is a registered architect or structural engineer, in the absence of International Code Council (ICC) certified Residential Combination Inspector (RCI) or Combination Inspector (CI);
  • Updating when Form HUD-NPMA-99-B, New Construction Subterranean Termite Service Record is required to align it with the four acceptable termite treatment applications reflected on the form HUDNPMA-99-A. 

There are new additions to the FHA Lenders’ Handbook, HUD 4000.1, to reflect these and other modifications to the new construction loan program. HUD 40001. will be updated with the following information describing the eligible property types for new construction loans, and effective immediately the following property types are considered acceptable for FHA financing:

  • Site Built Housing (one- to four-units);
  • Condominium units in Approved Projects or Legal Phases;
  • Manufactured Housing 

Borrowers who are not sure how these modifications affect a pending home loan transaction should consult the lender–the FHA allows participating lenders to begin using these modified rules effective immediately, but also mandates that they be used for ALL FHA home loans with FHA case numbers assigned on or after January 4, 2021.

That means in the interval between October 22, 2020 when the changes were announced to January 4, 2020, not all participating lenders may choose to adapt the new policies until they are required to do so.

Your financial institution’s choice to implement the new rules now or later will be a factor in determining what applies for FHA new construction loans with FHA case numbers issued prior to January 4, 2021. Your lender may or may not choose to implement the new rules immediately–be sure to ask if you aren’t sure whether these program modifications will apply and how they might affect your mortgage transaction.

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