Using FHA Construction Loans for Modular Homes
Modular homes have been gaining in popularity over the past decade. Consumers love their energy efficiency, the fact that they are built in a controlled environment (and are thus more structurally sound), and their convenience. Cost is also something homebuyers love about the modular home. A custom built modular home costs an average of 20% less than a traditional house.
For most homeowners though, buying a modular home will still mean incurring labor costs from the construction of the home. While modular homes require fewer man hours to construct the home, there is still a substantial cost to the consumer. Some modular homes are quite large, they need to be built to meet local building codes, and they are set on permanent foundations. Because of this, traditional financing is available to modular home buyers.
For home buyers who are building their own home, such as a modular home, rather than buying a pre-existing one, loans are available for the construction of the home. A permanent mortgage is then available after the construction of the home is complete. To make matters simpler, a "construction-to-perm" loan is available, which requires only one loan rather than two, saving the home buyer time and costs-rather than two closings, there will be only one.
Financing for a modular home that has not yet been built is somewhat different than when a homebuyer buys an existing house. Typically when a homebuyer buys an existing home, unless he is paying in cash, he will obtain a mortgage, which will pay the seller of the home in full before the buyer takes possession. When a buyer chooses to build a home though, he will typically make periodic payments while the home is being constructed. Often, a buyer cannot wait until the home is completely finished to pay the dealer and general contractor in full. However, there are options for buyers who cannot afford to make periodic payments or who cannot afford to start paying a mortgage until the construction is complete.
Consumers will be delighted to learn that the Federal Housing Administration offers a one-time close mortgage, that allows a buyer to have a home built and financed under one loan. Most of the FHA lending guidelines for existing home mortgages apply to one-time close home loans. An added benefit is that with an FHA one-time close mortgage, no loan payments are due during home building. Rather, the first mortgage payment is due once the construction is complete. The FHA one-time close mortgages can be for 15 or 30 years. The buyer must be able to show an ability to repay the loan.
But how much of a down payment is required for a "construction-to-perm" home, or one-time close mortgage? Low down payments of 3.5 percent are available for first time home buyers. The FHA also does not require as stringent of a credit qualification as other one-time close mortgages. Fortunately, these FHA one-time close loans are available to not only those building a traditional home, but also to buyers of modular homes, which make the purchase of land, labor for building the home, and the home itself, much more accessible.
Although a buyer must pay mortgage insurance with an FHA loan, the benefits likely outweigh the costs. There is a total reduction in total cost due to only one closing. Therefore, there is only one closing prior to the start of construction, and the buyer does not have to worry about re-qualifying for the loan once the construction is complete. Additionally, it reduces the interest rate risk. The buyer does not have to make any payments during the construction, which saves buyers the trouble of having to pay construction costs while paying their current living expenses such as rent or a mortgage. The FHA loan will accept those who have poor credit scores as long as they can show their ability to repay the loan. An FHA loan is a great financing option for those who want to buy and build a modular home.