Construction Loans, how difficult are they to obtain….

by Tom Matteson, Paramount Mortgage Funding

tmatteson77@pmfmortgages.com

 

With raw land prices dropping everywhere and the cost to build down, now more than ever might be a good time to think about building your own home.  It may not be as easy as it used to be, but it is still attainable with the help of FHA.  Three to fours years ago during the home building boom getting a construction loan for a spec house, or a primary residence was very easy.  With all the stated products such as no income verification loans and Alt-a  mortgages being pushed through, getting a construction loan was fairly easy and  many times required no money down.  Those days are long gone and for good reasons.  This sector of the business was responsible for the huge increase in home prices between 2003-2006 and is one of the main reasons we are in this mess.  These Alt-A lenders were handing out construction loans to investors like they were handing out Halloween candy.  With that said, much tighter regulation was needed in this sector and the investor needed to be eliminated from this sales cycle.  Once again it’s FHA to the rescue.

 

Their program is really straight forward if you have 10% down, a decent credit score (above 620), and you plan to live in the house as your primary residency.  These factors should get you approved, baring any unforeseen credit, or lender issues.  You can buy the land first or do it all at once, the choice is yours.  If you obtain the land first with a mortgage, that mortgage will be rolled into the new construction loan, once the project has been completed. 

FHA usually disburses the money to the construction company in two draws.  Once every item has been completed on the first punch list the contractor is then allowed to proceed with the second phase of the project, at which time the last set of funds are disbursed to him.  However, you will be making full payments on the mortgage even while the project is being completed, so finding a competent and professional contractor who you trust is imperative.  Most people don’t like making mortgage payments on homes they can’t live in, so try  to make sure it takes no more than three months to complete the house.  The only other option you have is to build the house yourself.

 

FHA will allow for an owner builder situation.  However, you have to prove competence in the industry, with a letter, a portfolio of completed work, and customer referrals.  You can also use a family member who has competence in the field under this provision to do the work.  They will have to prove the same level of competence in the field.  With that said, they will be much harder on an owner builder when it comes to the inspection and approving the work, so be careful. You can’t be an owner builder and expect to cut corners and not do things up to code, because if you do they will shut you down and delay the whole project.

 

Building your own home has been the American dream for 230 years and it is a viable option for home seekers, even in this terrible housing market. It will take patience and cooperation to complete the project. The first step is securing the financing because there is a lot of work involved in these kinds of loans and the financing is the most important piece.  So before you look at plans, look at lots, call a mortgage professional to get pre-qualified.

Thomas Matteson

Mortgage Consultant/Licensed FSP

Paramount Mortgage Funding, Inc.

Phone: 813-469-9762

Fax: 1-866-475-7508

Email: tmatteson77@pmfmortgages.com