The Federal Housing Administration (FHA) has recently increased its costs, but it is still one of the most advantageous loans on the market today. An FHA construction loan gives you options that other loans from government sponsored entities (GSEs) simply do not have, but you have to qualify first. Here are the basics of what it will take.
Is My Income High Enough for the House That I Want?Â
In order to qualify for an FHA construction loan, your income should be high enough so that just under one third of your pretax monies goes to the mortgage. Thirty-one percent is a number that is often quoted. When combined with all debt payments, the mortgage can take up no more than 45 percent of your income. These numbers are not hard and fast; the individual lenders can change them to an extent. However, qualifying parties will usually have numbers around this level.
If you run the numbers and you cannot make the percentages work, then you may need to look at properties that cost less.
Am I Using the Money for a Primary Residence?Â
Unlike some of the other GSE programs, FHA loans are only eligible when used for a primary residence, so real estate investors cannot use the construction loan. You can, however, use the construction loan to build a house that could be used as a rental property later. Check with your real estate lawyer to understand the particulars if you are looking to gain a rental income from your new residence.
What Does My Credit Score Need to Be?
FHA loans are among the most lenient GSEs when it comes to critiquing your credit score. Even if the lender applies a minimum credit score that is in the 600s, the FHA itself only requires a 580 FICO score. You may be able to negotiate your score level, but you will likely be negotiating with the lender, not with the FHA, and your down payment percentage may change based upon the credit score that you bring to the table. In general, try to stay away from the bare credit minimums of the FHA and lenders.
Take stock of your credit report at least six months ahead of the first offer. Fix all of the mistakes that may be on your report, because bankers will only be able to discern your credit record from the statistics that you give them.
Do I Need to Close All of My Credit Lines?
Contrary to popular belief, you do not need to close all of your extra lines of credit. This actually does not improve your credit score the most; keeping two lines of credit open is the best option. FHA officers will be looking for these two lines of credit, and if you do not have them, you will need to bring forward a substitute method in order to qualify. It is much easier just to keep the credit lines open.
Having two credit lines open does not mean that you have to hold a balance on those lines. As a matter of fact, you should pay them off as soon as you can, holding them open at a zero balance.
Does Having a Bankruptcy on My Record Disqualify Me Automatically?
Having a bankruptcy does not disqualify you from an FHA loan, especially if that bankruptcy is incurred from an unexpected emergency such as a medical expense that insurance does not cover. You will need to bring in extra documentation to show a consistency of income and payment. Consistency is the key to getting an FHA loan, and the documents that you bring in should showcase your efforts to get your credit back in line, show your income to pay the loan, and perhaps put in more of a down payment.
What Kind of a Down Payment Should I Have in Order to Qualify?
The minimum for an FHA loan in most cases is 3.5 percent; however, borrowers with an especially low credit score may be required to put down 10 percent. In general, it is much less expensive to fix credit than it is to gather together 6.5 percent more of a down payment. If you have a choice, take the time to get your credit score up. You will save yourself the upfront cost of a higher down payment, and you will have a better chance at a lower interest rate as well.
Do I Have Enough Money for Fees?
Although the down payment on a loan is lower with the FHA, the fees that must be paid upfront cannot be sidestepped. You will be paying 1.75 percent of the total value of the loan upfront in the form of a fee. If you do not have at least 20 percent on your down payment, then you may also be responsible for the private mortgage insurance (PMI) payment as well.
The PMI payment change is one to note: PMI must now be paid for the full loan term. You will no longer be able to drop the PMI charge every month once you have built up the appropriate amount of equity as before. An extra 1.3 percent on your mortgage per month is nothing to sneeze at, so do everything you can to put together 20 percent for a down payment.
2 Point Highlight
You may be able to negotiate your score level, but you will likely be negotiating with the lender, not with the FHA, and your down payment percentage may change based upon the credit score that you bring to the table.
Consistency is the key to getting an FHA loan, and the documents that you bring in should showcase your efforts to get your credit back in line, show your income to pay the loan, and perhaps put in more of a down payment.
