Many people are wondering if FHA home building loans exist. Are there FHA construction loans? By definition, the answer is no. An FHA loan is a government insured mortgage loan. The Federal Housing Administration (FHA) insures mortgages of many different types, but a construction loan or home building loan is not a mortgage. Since a construction loan either doesn’t involve payments at all, or only requires small interest only payments, there is no need to insure a construction loan in the way FHA insures a mortgage. However, those who want a construction loan can get an FHA mortgage on new construction, to pay off their home building loan.
FHA Home Building Loans Work Around
FHA Home Building Loans Work Around: Two Different Loans to Build a House
In order to build a house you will need both a home building loan, and a mortgage loan. A home building loan is designed to give out money, to fund your construction, not take in money in repayment. The term of a construction loan is one year or until your home is complete. Once the home is complete, your home building loan is due in full. It’s what is called a balloon payment. The mortgage loan is designed for the purpose of repayment. Therefore it is necessary to have a mortgage loan, unless you are prepared to pay off the entire cost of your home upon completion of the construction, but most people aren’t.
A home building loan is designed to hold borrowed money in an escrow account, until your home builder needs it. Money is withdrawn from escrow as needed on a pre-determined schedule. Some home building loans require interest only payments, which are the responsibility of the homeowner, but with other the interest is just added to the amount borrowed. A home building loan is not designed to be repaid, except by the establishment of a mortgage loan, which replaces it when the home is complete. The sole purpose of a home building loan is to finance the building of a home. It is a short term loan with no built in method of repayment. Since a home building loan is not designed for a method of repayment, there is no need to insure repayment. Instead the home building loan is repaid in one easy payment provided by the mortgage loan.
When you get an FHA mortgage loan, it borrowed from any private lending institution that is FHA approved. The Federal Housing Administration does not actually provide the capital for the loan. The lending institution provides the money for the loan. The FHA backs the loan with mortgage insurance, so that in case you default they cover the bank’s loss.
In some ways an FHA mortgage loan is like a co-sign from Uncle Sam. It allows the lending institution to treat loans for people with less than ample resources or perfect credit the same as they do people with great credit and millions of dollars. Why? Because Uncle Sam has vouched for you, in a very similar way to having a really rich uncle co-sign your loan. If they suffer loss because you can’t repay, then the government picks up the tab, unfortunately you can possibly be foreclosed and evicted, even with an FHA loan, but there are a few more options open to you before that happens.
There are also other mortgage insurance plans both publicly and privately owned, all over the world. If you plan to borrow more than 80% of the value of your home on a mortgage, you will usually need mortgage insurance of some type. Like any insurance mortgage insurance comes with premiums that must be paid. FHA insurance premiums are included in your monthly mortgage payment (MIP.)
Although there are many ways to obtain these two loans, one of the best ways is to close both loans at once. It saves on costs, locks in your low interest rate mortgage, and no doubt makes lending institutions feel more secure as well. The fact is that your home building loan and your mortgage loan are both necessary in order to both build the home and repay the loan. When both loans are closed before construction begins, there is absolutely no risk of the construction loan not being repaid. It will be repaid automatically by the mortgage loan.
For more information on construction loans, mortgage loans and FHA loans you can download our 98 page book and read some of the articles on our site. FHA mortgage loans are helpful in obtaining a construction loan, but there is no such thing as FHA home building loans.
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