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FHA Loans: Existing Construction, New Construction

May 23, 2023


Which type of property should you buy? A brand-new home, a house that has been on the market for some time, or a house you propose to build from the ground up using an FHA One-Time Close construction loan?

This is a question raised by a Yahoo! Finance article from May 20, 2023. That article observed that in the current mortgage market, some borrowers may be getting good deals by purchasing recently built homes; homes that have never been owner by another person.

“While the average mortgage rate remains stuck above 6%, buyers of new homes are getting a much better deal,with borrowers buying homes far below the mortgage rate reported at the time this article was written; 6.5%.

According to that article published by Yahoo! Finance, house hunters looking at homes existing less than one year are paying dramatically lower interest rates (rates in the 5% range as opposed to the 6.,5% range) for buying homes that have existed for a year or less.

There are different types of FHA loan for different property types.

Do you want to build a home on your own lot? You will need an FHA One-Time Close construction loan, which differs from the FHA mortgage you need (an FHA 203(b) home loan) to buy an existing property.

You read that correctly; home loan choices don’t end when you decide to buy a certain kind of house; a home in the burbs, a manufactured or modular home, or a condo unit.

Some feel right about exploring FHA construction loan options, others may consider buying a house built recently but never occupied. 

In that scenario, the borrower may need to choose between a construction loan or a New Construction loan, which the FHA Lenders Handbook, HUD 4000.1 describes as follows:

“New Construction refers to Proposed Construction, Properties Under Construction, and

Properties Existing Less Than One Year,” which means the property has never been sold and occupied by a buyer.

Existing Less Than One Year is different from homes meeting the “existing construction” definition. Why?

“Existing construction” homes may or may not have been occupied, but property Existing Less Than One Year refers to a property that has not been purchased or occupied since its completion less than one year from being completed.

Is it a good strategy to consider a home that was built in the last year because of the interest rate savings? The answer may feel obvious to some, but don’t forget that much rides on the applicant’s FICO scores. Those scores are used to help the lender decide on the interest rate offered to you.

The shortest answer is, Yes, you should explore your options for buying a recently constructed home. 

But if your FICO scores aren’t high enough to qualify for a lower interest rate, it is smart to consider other home loan types such as existing construction, condo loans, and manufactured home loans which may have higher interest rates but may be better suited for some borrowers.

Joe Wallace - Staff Writer

By Joe Wallace

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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