Applying for a Federal Land Construction Loan
If you are looking to build your home rather than purchase a constructed home, you may look to a Federal Housing Administration (FHA) land construction loan for inexpensive financing. This loan is only available if you are building on the land with the intention of living in the home yourself. If you are looking for a construction loan to build a commercial facility or other development, you will need to consider other loan programs. With this loan, you will be applying for the construction costs to build the home and not the actual purchase of the land.
Basic Loan Requirements
You must meet basic credit requirements in order to achieve an FHA secured loan. These loans are actually distributed through private lenders, then guaranteed by the FHA. This means you need to have private lenders willing to work with you based on your credit score. FHA loans may be available to people with lower than average credit scores, but you must prove you can repay the loan based on your credit. You will need to have 5% of the total loan amount available to place a down payment. You must also not owe more than 30% of your income in debt.
Getting Loan Documents
Documents for FHA loans are available through your local service office. This process may be confusing, so working with a loan officer will help you move through the steps. You will need to prepare the following documents in order to have your FHA application move to the funding stage:
- Note - A Promissory Note that states the amount you are borrowing, the interest rate, repayment terms and monthly payment amount must be prepared.
- Deed of Trust - This is the document that ensures your property is secured for the loan. It is the document showing your collateral and is recorded at the city recorder's office.
- HUD 1 - This document is the break-down of all the fees you have incurred for obtaining the loan.
All documents must be prepared and notarized for your loan to go into the funding stage.
Initial Land Appraisal
Before any lender approves your land loan, the lender will come to inspect and appraise the site where you intend on building your home. Your architect must also provide plans for the building for the FHA and lender to review. This is to ensure the home you are building will actually be valued at the price of the loan you are receiving.
TIP: If you are working with an FHA-qualified lender through this process, you will be able to cut back on a lot of paperwork. These lenders can approve you for the FHA loan directly, instead of requiring that you apply separately for the guaranty.
How Funds are Distributed
Once you get your loan, you will receive funds in small amounts rather than all at once. Appraisals may be required along the way in order for your lender to release additional funds to you. Since you are in a binding contract with a government agency, you cannot change your building plans unless you have the changes approved by your lender and the FHA.