When looking for a construction to permanent loan, we found three options, USDA, FHA, and Conventional. Each one had its pros and cons, and we carefully weighed each one out versus the other before making our final decision. I’ll share everything I learned with you in hopes it can help if you need to finance building a home via a construction to permanent loan!
USDA Single Family Housing Guaranteed Loan
Our first choice was actually to go with USDA Single Family Housing Guaranteed Loan. Though you have to be building in a rural area to qualify for this loan, surprisingly more of the United States is labeled as ‘rural’ per the USDA then I would have thought, including our new home. I’ll link the website for their eligibility search at the bottom so you can see if your area qualifies. To qualify for a USDA loan, you need a minimum credit score of 640 with no bankruptcies or foreclosures and an approximate debt to income ratio of 29/41. You must also be building a single family home that you will be residing in.
Pros:
1. Single closing costs
2. $0 down- that’s right no down payment at all is required for loans up to $417,000.00
3. No maximum purchase limit
4. Funds can be used to purchase essential household equipment such as appliances.
5. Closing cost can be financed into the loan
6. 30 year, fixed rate
Cons:
1. Income limited to 115% of area median income
2. House size based on income
3. Lendors are few and far between
These are cons for us because we are self-employed. We write off a lot so the actual income we show would have to be balanced between little enough to qualify us but enough to qualify us for the house we wanted to build so we had to work with our financial advisor to make these numbers work perfectly. Unfortunately, this program ended up being a MAJOR waste of our time! They were only able to provide us with one lender in the United States who could handle this loan for us. The very first day we spoke with them we told them we were building a 3,500 sq ft home and we were looking at a 12 month build time. We sent them our plans the very first day, so they knew exactly what we were looking for. We then went through the process of having our builder send in his builder packet to be approved. 4 months later, after many weeks of waiting for returned calls, watching the mail for packets they supposedly mailed us etc… , they advised us that they were unable to provide us a loan because due to the size of their bank, they were not comfortable with the size of home we were building, the amount we needed and they wanted us to build it in 6 months! Things we told them the first day we spoke with them! Very frustrating to say the least! So, while this loan is a great program, it is very tricky to qualify for it and even harder to find a lender to approve you for it! If you do decide to go this route, make it very clear to them from the beginning what you are looking to build and make sure it is within their bank’s comfort zone.
FHA
FHA is a fabulous program with many positives! A few notes regarding eligibility, you must have purchased your land less than six months before applying or be buying your land at the same time. You cannot get a loan on land you have owned for a long time. Like a USDA loan, your builder must go through an approval process if they are not already approved. You must have a minimum credit score of 620.
Pros:
1. Single closing costs
2. Reduced Down Payment – for us this meant 3% down
3. Pay interest only during the construction phase
4.Higher debt to income ratio acceptable
5. 30 year, fixed rate
Cons:
1. PMI for the life of the loan
2. Can add layers of complexity to loan process so can make it more difficult to find a lendor
3. For us, FHA required an additional year of tax returns factored into to our average income which brought our total down thus lowering our debt to income ratio
Conventional
There is not a whole lot to say about a conventional loan that you don’t already know. Things can vary from bank to bank but for ours, you needed a minimum credit score of 640. Debt to income ratio was approximately 44% since we have PMI.
Pros:
1. Easier to meet all guidelines
2. Lower PMI and only required until 80% of the loan is paid off or home appraises at a higher value after the 2nd year.
3. Single closing costs
4. Interest only payments during construction
5. 30 year, fixed rate
Cons:
1. 6% down payment
After the frustration of dealing with USDA, we went through a local bank and a loan officer that was a friend of ours. We knew she would be honest with us and fight for us to make sure the loan was approved. Once with our local bank, it came down to FHA vs. Conventional. While the idea of a lower down payment was attractive, once I sat down and wrote out the exact long-term cost of everything, it wasn’t the better deal. With FHA, our PMI would have been $239.00 for the life of the loan. Conventional’s PMI is only $107.63 per month, and we can eliminate it by owing less than 80% of the home’s value, so either paying an additional 10% off our mortgage or by getting the house appraised at a higher value. So with conventional, we paid more up front, but it went on our mortgage vs. paying more long-term with FHA, and it only pays for insurance, so basically wasted money.
Whichever construction to permanent loan you choose to go with, make sure you carefully weigh out your options. Some loans may require you paying off your car (see my previous post about getting financed) or bringing more cash to the table, but in the long run, they actually cost you less. So yes, we ended up paying the most out of pocket with conventional, but it was the wisest use of our money. Make sure you do your research and know what you are talking about, so there are not any surprises! Also, a very crucial thing to verify is that you are applying for a SINGLE CLOSE LOAN! No one wants to pay closing costs twice so make sure before you begin the process that you are only paying once! Hopefully sharing all this information will be helpful to someone! As always, if I can answer any questions or give you any pointers, let me know!
USDA Eligibility Map: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do