Using land equity on your FHA construction loan.

If you own your land already you may not have to make a cash down payment. In fact you may be able to roll in any closing costs and/or prepaids. HUD (they write the guidelines for FHA construction, purchase and refi loans) wants the borrower having some kind of investment in the home, cash or land equity.

Land equity comes in three forms. First, if you have your land gifted to you. Second, if you put little to no money down on land over a year ago and it has appreciated. Last, if you made a cash down payment on land within the last year, you will be credited that dollar amount at closing.

As always, give me a call or email and I will be able to run through the numbers on your personal situation. 


Manufactured or Modular Home?

Many of my referrals come from factory built home dealer/builders. These homes are great for the FHA construction loan program, they save on construction costs and time. They are built with quality materials, in a controlled climate, to very tight specs.


The first question I always have when speaking to a new client that is buying a factory built home, "is it a modular or manufactured home"? The most common response is silence or "I don't know". So let's take a moment to go over the difference.


Manufactured homes are built to the Federal building code, which is also referred to as the HUD building code. These homes typically come out of the factory in one section, also know as a "single wide" (which are not eligible for the FHA construction loan) or two sections, aka a "Doublewide" (which are eligible).


Manufactured homes will have a 1" x 3" red HUD code tag on the lower, right hand of the exterior of each section and a metal undercarriage. They can be placed in "parks" where the land will be rented or on a permanent foundation on land that you own. The ownership of the home is documented with a title similar to an automobile title. If the home is place on land that you own you have to go through the process of "retiring" the title with the state government.


Manufactured homes typically are built in a ranch style, have a lower roof pitch, and lower ceilings. If they are built on a basement you should be able to see the metal undercarriage that supports the floor. These homes are shipped from the factory by putting axles and wheels in the metal undercarriage.  


Modular homes are built to the state building code, just like stick or site built homes. They can have any number of sections and can be built to any style. Since these homes are rarely, if ever, placed in a park, they don't have an automobile type title. They are shipped from the factory on a flatbed truck and craned on to the foundation. 


As a practical matter I greatly prefer to use the FHA construction loan program on Modular homes. The appraisals are easier since site built home sale comps can be used. On a Manufactured home the appraiser must be able to find other manufactured home sales, in the area, in the last 6 months. This is difficult in most areas and impossible in others.


Modular homes will cost a little more but it's my experience they will hold up better through the years. If you can afford it, get a Modular home.  


For more information check out these articles at Wikipedia; 



Owner Builder Loans

I frequently have potential borrowers state that they want to participate in the construction of their new home to save money. Unfortunately this is another layer of risk for construction lenders in an already risky loan. No lender I know of will allow the borrower to do this on a low down payment 1x close loan. Typically a borrower will need to have a full builder contract, a contract that does not contain any reference to the borrower being responsible for any part of the construction.


There are a small group of lenders that will do construction loans for owner/builders but the requirements are high. The borrower will need to have at least a 20% down payment or equity into the project, a credit score in the 700’s and a reasonable debt to income level. They will need to present a complete line item budget for the project when applying. They should also have several thousand dollars in cash reserves as “float” money, cash for labor and materials prior to getting a draw for the completed work. Borrowers will typically have to pay 3-5 points plus standard closing costs to get these loans.


These owner/builders will then have to refinance these loans once the project is complete. They will need to order a new appraisal and completely requalify for the end loan. This is known as a two-time close process.



New home builders should take some time to consider just how much they will by being their own contractor, and the time it will take out of their lives, before wandering down this road.

Don't over build!

So you have a budget for the home you want to build and you really need to get as big a home as you can. Maybe you have a large, growing family and need all the bedrooms and bathrooms that you can get. You may be tempted to spend less on the land and more on a bigger home. Big mistake!


Maybe lots of land is your thing. Why buy a 1 acre parcel when you can get 10 acres! Also a big mistake.


Take a careful look at the sales of other homes in the area. You want to be inline with the prices, style, and land sizes of these homes. If you don't, you may be headed for lower than needed appraised value for your construction loan.


The FHA appraiser will have to use recent sales of similar homes to justify what you are spending to build your home. HUD (the administrator for FHA loans) will only allow an appraiser to make small adjustments up on the sale price of a smaller home. So you may find yourself spending $200,000 on a home that may only appraise for $160,000 due to the fact that most homes in the area sell for $120,000. Even though those homes may be smaller than what you want to build.


If basements are the standard foundation in your area, don't build on a crawlspace or slab. Don't build a two-story home in a subdivision of ranch homes. Lenders don't like to lend on odd homes for the area. The lender always has to think about how much and how quickly they can sell the home if they have to foreclose. Homes that are "unique" for the area or have unique features don't sell as quick, or for as much, as conforming type properties.

What not to do after you apply for a mortgage.

A mortgage application, of any kind, is suppose to be a "snapshot" of the applicant's employment, income, debt, assets and credit worthiness. Don't move while the lender is trying to take this picture!  


How do you "stand still" and not jeopardize your approval? Follow these rules;


1. Don't quit or changes jobs. 

2. Don't buy anything on credit. This includes credit card purchases.

3. Don't apply for new credit. This could affect your credit score.

4. Don't move large sums of cash from one account to another.

5. Don't payoff, or pay down, your current debts.

6. Don't make your Good Faith Deposit in cash. 


It's possible that you could make any of these moves and still be approved. Just make sure you have a discussion with your loan officer before making these moves.