While FHA construction loans are one of the loan programs offered by the Federal Housing Administration, some fundamental differences exist between them and other types of mortgages offered by FHA. It is imperative for borrowers to understand the differences between FHA One-Time Close construction loans and different loan types. This is to ensure that they are making the right decision, mainly as these loans affect transactions differently.
Below is a brief overview of FHA construction loans as well as the differences and similarities with other mortgage programs offered by the FHA.
The One-Time Close Construction Loan Appraisal Requirement
When applying for an FHA loan for the purchase of a home that has been tagged as an “existing construction,” which is a building that has been constructed for a minimum of a year with at least one owner, the process of appraisal comes as a condition for approving to loan. This is to ensure that the property meets the minimum standards set by the FHA.
Once you apply for an FHA One-Time Close construction loan, otherwise known as FHA construction-to-permanent loan, it is required that a team inspects the property to ensure it meets the minimum standards. The inspection requirements for New Construction properties broken down into the nature of the property are explained by the HUD 4000.1 as follows:
One of the categories of properties according to the provisions of the HUD is the proposed construction. The inspection requirements for a proposed development as it concerns the lending institution are briefly highlighted as follows:
- Obtain copies of the building permit and Certificate of Occupancy
- FHA Roster Inspection on form HUD-92051
- Compliance Inspection Report (for Modular Housing, footing and final only)
- 3 inspections as above carried out by the local authority that has jurisdiction over the Property (for Modular Housing, footing and final only); or
- A 10-year warranty and final inspection report issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector.
The under-construction property is the other category of property as stipulated by the HUD. Below are the requirements that must be obtained by the lending institution in this situation.
- copies of the building permit and Certificate of Occupancy (or equivalent); or
- a 10-year warranty and final inspection issued by the local authority that has jurisdiction over the Property or an FHA Roster Inspector.
FHA One-Time Close Construction Loans Require A 10-Year Builder’s Warranty
One of the significant items mentioned as part of the requirements in the list above is a 10-year builder’s warranty. This is a requirement and a condition for approval of the loan for FHA construction-to-permanent loans. However, it is worth noting that the warranty is a requirement for new construction FHA loans, and is not particularly needed for the purchase of existing construction properties.
What is a ten-year warranty as defined by HUD 4000.1?
According to the HUD 4000.1, a 10-year builder’s warranty is defined as follows:
“Ten-year warranty refers to an agreement between the Borrower and a plan issuer which contains warranties regarding the construction and structural integrity of the Borrower’s dwelling securing the FHA-insured Mortgage. The plan must be a HUD-accepted insured ten-year protection plan.”
Higher FICO Score Requirements for FHA One-Time Close Construction Loans
FHA construction loans tend to be a bit more challenging to find as most lending institutions often shy away from them. Another reason for the relative scarcity of this type of loan is the higher FICO score requirement compared to other mortgage programs. Depending on the lending institution, FHA One-Time Close FICO score requirements tend to be higher than for different types of mortgage loans backed by the FHA.
The higher FICO score requirement is due to the risk involved in construction loans, as they are substantial investments with more significant inherent risks for lending institutions. Consequently, stricter credit history requirements are put in place for such loans.
There are also instances of lenders not allowing One-Time Close mortgages for homes that are not “stick-built.” A stick-built home is a type of house built from the ground up including pouring a new foundation, while a non-stick built home could be a mobile or manufactured home.