With low interest rates, long-term amortization and up to 90 percent loan-to-value, a Federal Housing Administration new construction loan is very attractive to a builder, assuming she qualifies. It's a challenge: The FHA is notoriously stingy when it comes to approving new construction loans with a declination rate of roughly 50 percent. Not only must you qualify under the FHA guidelines, the project itself must be something the agency has an appetite for.
To get an FHA new construction loan, load up on documents. Prepare the standard loan supporting information such as bank statements, pay stubs, W-2 forms and tax returns. You'll also need an outline of the project, a budget, specs, plans and approvals, in addition to appraisals and environmental studies. Pulling this information together is expensive and can be risky, considering you have no guarantee that your loan will be approved. However, it’s a catch-22, as you need to sell the viability of the project to get the loan.
Armed with your documentation, you must now find an FHA-approved lender that offers FHA new construction loans. You will meet with an officer and detail the project, providing all the supporting information you have available. The project will be subject to a third-party study that will be submitted to the U.S. Department of Housing and Urban Development. The study will analyze the feasibility of and demand for your project. If HUD concurs that the project is viable, it will send you an invitation letter. However, this letter means little more than an acknowledgment that you can apply, because HUD doesn't expect every builder it invites to end up closing on the loan.
The down payment on an FHA new construction loan is lower than a conventional construction loan, but higher than an FHA home mortgage. While an FHA mortgage can close with only 3 percent down, an FHA new construction loan requires 10 percent. This money can’t be financed, but must come from your personal funds as evidenced by bank statements or from a gift accompanied by an explanatory gift letter. While 10 percent is significantly less than the conventional 20 percent, the FHA doesn't like smaller deals under $2,000,000. You'd need to have $200,000 on hand in capital to make up the 10 percent down payment on $2,000,000 to close the loan.
The loan will be subject to the FHA’s underwriting guidelines. While you will have provided a great deal of documentation, the FHA may want to go ahead with its own appraisal and environmental studies, which can cost several thousand dollars. If the FHA decides to move forward, whatever offer it makes is final and non-negotiable, as it is not a private market deal. The lender has a window of three years on the loan, comprising nine months to close, 12 to 14 months for construction and an additional 12 months to stabilize the property. The time frame is out of the lender’s hands and is subject to the FHA’s turnaround time.