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What is an FHA OTC NEW CONSTRUCTION LOAN
Can you explain what an FHA OTC NEW CONSTRUCTION LOAN IS? How do I qualify and get approved for an FHA One-Time-Close New Construction Loan? What are the eligibility requirements? How does it work? What is the steps of the mortgage process on the FHA OTC NEW CONSTRUCTION LOAN?
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2 Replies
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What is an FHA One-Time Close (OTC) New Construction Loan?
An FHA One-Time Close (OTC) New Construction Loan enables borrowers to finance the construction of their new home and the permanent mortgage with one loan and one closing. It combines lot purchase (if necessary), construction financing, and permanent mortgage into a single loan, simplifying the process and saving on costs related to multiple closings.
How Does an FHA OTC New Construction Loan Work?
FHA OTC loan allows for financing the home-building process with just one loan. Here’s how it usually works:
One Loan Approval: The borrower is approved for the full amount of the loan, including land costs (if applicable), construction costs, and permanent mortgages.
Single Closing: The borrower goes through a single closing procedure covering both phases—the construction and the permanent mortgage.
Construction Phase: Payments, called draws, are made in stages to cover construction costs while work progresses.
Permanent Mortgage: As soon as the building is completed, this kind of loan converts into a typical FHA mortgage, eliminating the need for another closing.
Eligibility Requirements for an FHA OTC New Construction Loan
Credit Score:
Lenders typically require a minimum credit score between 620 -640, but this may vary from lender to lender.
Down Payment:
The minimum down payment required is 3.5% of the total loan amount.
Income & Employment:
Income must be stable and verifiable
Must have worked continuously in current job or industry for at least two years.
Debt-to-Income Ratio:
The maximum debt-to-income ratio allowed is 43% in most cases, but exceptions can be made if compensating factors exist.
Property Requirements:
The house should be a single-family dwelling unit meeting all applicable Federal Housing Administration standards & requirements.
Builder Requirements:
Builders must be authorized by the Department of Housing and Urban Development and possess a valid builder identification number issued by them.
Primary Residence:
This type of mortgage is meant for owner-occupied homes only; it cannot be used on investment or rental properties.
Steps to Qualify and Get Approved for an FHA OTC New Construction Loan
Pre-Approval:
Get pre-approved by an FHA-approved lender. They will review your credit, income, and financial situation to determine the amount you qualify for.
Select a Builder:
Choose a builder who the Federal Housing Administration approves. Make sure they have their own valid builder ID number from HUD.
Submit Documentation:
Provide all necessary financial documents, such as tax returns, pay stubs, bank statements, etc., as required by the lender.
Property & Construction Plans:
Submit property details and complete construction plans, including cost estimates and timelines.
Loan Approval
The lender will evaluate your application, financial documents, and construction plans; if everything meets their requirements, you will receive loan approval.
One-Time Closing:
Complete the single closing process, which involves signing loan documents, paying any necessary closing costs, and putting down the payment.
Steps of the Mortgage Process on an FHA OTC New Construction Loan
Pre-Approval:
Get pre-approved by an FHA-approved lender to learn about your eligibility and the maximum loan amount you can borrow under this program.
Select a Lot & Builder:
You should pick a suitable lot where you want your house built and then select a builder authorized by the Department of Housing and Urban Development (HUD).
Submit Construction Plans & Budget:
Send detailed construction plans together with cost breakdowns showing items like labor charges, etc., to enable lenders to determine the viability of financing that project through this plan.
Loan Approval & Closing:
Complete the one-time closing process upon approval, sign loan papers, and pay applicable fees.
Construction Phase:
After the accomplishment of building phases, money is paid in portions to the constructor, labeled as draws. Inspection might be necessary to ensure the work is done according to plan.
Conversion to Permanent Loan:
Once construction is complete, an FHA-backed refinancing occurs; it becomes a permanent mortgage without going through another closing. Afterward, you will start repaying regularly as agreed in the mortgage agreement form.
Benefits of FHA OTC New Construction Loan
Simplified Process: The one-time closing makes it less complex and expensive than multiple closings required by other types of loans.
Lower Down Payment: Unlike many other construction loans requiring higher percentages for down payments, this one requires as little as 3.5%.
Fixed Interest Rate: This locks against market rate fluctuations during the building period.
Builder Approval: The person or company you hire should meet all FHA requirements for authorization.
Documentation: You must prepare enough paperwork, including detailed plans showing how everything will be done.
Inspection Requirements: Various checks shall be conducted periodically while the construction is still being constructed.
With these steps and requirements at your fingertips, it will be easier for you to move forward with the FHA OTC New Construction Loan process and build your new home faster.
Gustan Cho Associates offers FHA OTC New Construction Loans.
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I would happily provide extensive clarification on FHA One-Time Close (OTC) New Construction Loans.
What is an FHA OTC New Construction Loan?
An FHA One-Time-Close Construction Loan, also known as a Construction-to-Permanent loan, is a mortgage that combines a construction loan with a traditional FHA mortgage. It permits borrowers to fund a new home’s construction and permanent mortgage with one single loan closing.
How FHA OTC New Construction Loans works:
- The loan covers both the construction phase and the long-term mortgage.
- You close on the loan once before construction begins.
- During construction, you typically make interest-only payments.
- Once construction is complete, the loan automatically converts to a permanent FHA mortgage.
Eligibility Requirements:
Credit Score: Minimum 620 (some lenders may require higher)
Down Payment: Minimum 3.5% of the total loan amount.
Debt-to-Income Ratio:
- Generally up to 46.9% front-end and 56.9% back-end.
- Manual underwriting can go up to 40% front-end and 50% back-end with two compensating factors.
- Must be owner-occupied primary residence.
- Property must meet FHA standards and local building codes.
- Must use an FHA-approved licensed general contractor.
Qualification Process:
- Meet minimum credit score and down payment requirements.
- Demonstrate stable income and employment.
- Have a debt-to-income ratio within acceptable limits.
Choose an FHA-approved lender that offers these loans
Select a licensed general contractor. Provide detailed construction plans and specifications.
Mortgage Process Steps:
Pre-qualification: Initial assessment of your eligibility. Choose a contractor and finalize building plans.
Loan application: Submit a formal application with the required documents.
Property appraisal: Based on plans and specifications. Underwriting: The lender reviews all aspects of the application.
Loan approval: If approved, you’ll receive a commitment letter.
Closing: Sign loan documents and pay closing costs. The construction phase Begins after closing, with periodic inspections and draws. The final inspection occurs once construction is complete.
Conversion: Loan converts to permanent mortgage.
Key Features:
Single closing: This saves time and may reduce closing costs.
Lock-in interest rate: The rate is set at closing, protecting from rate increases during construction. Interest—only payments during construction. Flexible draw schedule based on construction progress. No requalification is needed when transitioning to a permanent loan. They may have higher interest rates than standard FHA loans. They Require more documentation due to the construction aspect. Construction must typically be completed within 12 months. There is less flexibility to make changes once construction begins. Remember, while these are general guidelines, specific requirements can vary by lender. It’s advisable to shop around and compare offers from multiple FHA-approved lenders that offer these specialized loans.