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FHA OTC New Construction Loans
How does FHA OTC New Construction Loans work?
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These are mortgages called the FHA One-Time Close (OTC) New Construction Loans, which simplify financing a new home build. They combine the financing for land purchase, construction costs, and the permanent mortgage into one loan, requiring a single closing. This eliminates the need for multiple loans and closings, saving borrowers time and money.
This is how FHA OTC New Construction Loans work:
Loan Basics
Purpose:
- Used to finance land purchase, construction of a home, and permanent mortgage under one loan.
Borrower Type:
- It is perfectly suitable for those who meet FHA requirements, including first-time home buyers.
Single Closing:
- Instead of having separate loans for both construction and permanent mortgages that traditional construction loans would require, these are closed before construction commences, hence making it simpler than them.
How It Works
Application and Approval:
- Applicants apply for their loans through normal FHA loan underwriting procedures.
- Approval means verifying your credit score, income level, and debt-to-income (DTI) ratios and confirming your down payment ability.
Land Purchase:
- If the borrower does not own any land, their loan can include funds to buy it.
- If the person borrowing owns the land, they can use its worth as security towards their down payment.
Construction Phase:
- An escrow account is funded by the lender for construction payments.
- Builders are compensated in installments as construction progresses gradually.
- Examinations will determine if the project meets requirements before funds are released.
Interest During Construction:
- Usually, borrowers pay interest only on amounts disbursed during the construction period.
- Some lenders let you wait until construction is complete to start paying.
Completion and Conversion:
- After construction and when inspections pass, a permanent FHA mortgage automatically becomes a loan.
- Borrowers begin making regular principal and interest payments.
Key Features
Low Down Payment:
- If a borrower’s credit score is within range (580 or above), they can qualify with just 3.5% of FHA requirements being met as a down payment amount.
- The down payment could come from savings, gifts, or approved assistance programs.
Credit Requirements:
- 580 minimum credit score for 3.5% down and 500-579 with 10% down payment on an FHA loan
Loan Limits:
- FHA loan limits vary depending on where one lives concerning median home prices within that area or county
Loan Term:
- Upon completing the building process, these usually form a thirty-year fixed-rate mortgage.
Builder Requirements:
- FHA-approved builders must have the required licensing and insurance.
Inspection and Appraisal:
- Before approving the loan, FHA will check if the property meets FHA’s minimum requirements.
Benefits
Saves Time:
- Having only one closing for multiple closings helps to reduce costs.
Streamlined Process:
- Combines land, construction, and permanent financing in one package.
Lower Down Payment:
- Low down payment requirements of the FHA make this option more accessible to many borrowers.
Fixed Interest Rates:
- This protects them from market shocks.
Challenges
Builder Approval:
- The FHA limits the number of builders who can get approval, thereby reducing the options available for buyers.
Complex Documentation:
- Before proceeding with this loan program, borrowers must furnish detailed information regarding their construction plans, contracts, and estimates of expenditures.
Higher Fees:
- Costs during closing may increase slightly because they have been combined into a single loan package.
Eligibility Requirements
Income and DTI:
- Maximum DTI ratio of 43% (except where compensating factors apply).
Primary Residence:
- The home must be your primary residence and cannot be an investment or a second home (i.e., you must live there full-time).
Property Type:
- Only single-family dwellings and 1-4 unit residences are eligible—condominiums do not qualify for OTC financing under HECM guidelines.
Steps to Get an FHA OTC Loan
Choose an FHA-Approved Lender:
- Ensure your lender offers OTC loans and other options like regular mortgages, Jumbo mortgages, etc.…
Select an FHA-Approved Builder:
- Ensure you work with a builder who knows what it means to build houses under these guidelines.
Application Submission:
- Make all the required copies, including income documents, credit reports, and building plans.
Loan Closing:
- Once approved, funds are put on escrow while construction starts.
Building Follow-up:
- You must follow up with your lender and builder to ensure that everything is done as planned or within the set deadlines.
Moving In:
- After it is completed, your loan becomes a permanent mortgage.
FHA One-Time Close (OTC) loans offer an alternative for borrowers who want to construct their homes. But don’t want to go through the process of applying and closing one loan for the construction phase to apply and close another loan for permanent financing. The critical thing here is working with established lenders and builders who are well conversant with FHA’s procedures.