Rehab and Construction Loan Advice on Setting Budgets
May 3, 2024
Are you considering building a home from the ground up using a One-Time Close construction loan or buying a fixer-upper with an FHA 203(k) rehabilitation loan?
Are you considering refinancing your home with an FHA 203(k)? No matter what kind of construction or renovation project you have in mind, there are some guidelines each of these have in common that you should know about before getting started.
Save and Plan Your Contingency Reserves
Fannie Mae offers good advice about adding a contingency reserve to your budget. A contingency reserve is a specific amount of money set aside for the project to cover “unforeseen repairs or deficiencies that are discovered during the renovation.”
Fannie Mae says the contingency reserve ideally covers costs, including labor and materials, permits, and inspections. For best results, expect to save or acquire up to 10% of the project's total cost.
Setting the Budget Means Being Realistic
An important thing to know about budgeting for a rehab loan or construction project is that you won’t be able to rely on the bare minimum amount of cash to get by.
Construction projects typically face some cost overruns or problems related to higher expenses.
These can happen in the form of delays caused by bad weather, supply chain problems, or issues with waiting out permit approvals. Did supply chain woes force you to choose alternative materials to build with that cost more?
Did one phase of the renovation project take longer than expected? You could face these issues once the work gets underway. You will likely be disappointed if you don’t anticipate these problems and try to make a budget with razor-thin margins.
Set a budget that anticipates these problems. We cover how to do so in the next section.
Don’t Assume
Budgeting for your project means including all the necessary expenses, including those that some assume (wrongly) aren’t needed.
For example, you should still pay for a home inspection on a brand-new home. There is no way to tell that a defect or issue lurks in the newly built home without having an independent third party come in to review.
You may also need to pay for pest control services, flood zone determination, or other costs some borrowers don’t have to deal with. It’s wise not to assume these expenses won’t apply to you.
FHA, VA, and USDA: One-Time Close Loans
Want More Information About One-Time Close Loans?
We have done extensive research on the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
FHA.com provides information and connects consumers to qualified One-Time Close lenders to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
Please note that investor guidelines for the FHA and VA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs, including but not limited to: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes, Dome Homes, Bermed Earth Sheltered Homes, Tiny Homes, Accessory Dwelling Units, or A-Framed Homes.
Contact Us: Send Us Your Request – Spam Safe
Please send your email request to [email protected] which authorizes FHA.com to share your personal information with one mortgage lender licensed in your area to contact you.
1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $1,500,000 and review higher loan amounts on a case-by-case basis. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.
Are you considering refinancing your home with an FHA 203(k)? No matter what kind of construction or renovation project you have in mind, there are some guidelines each of these have in common that you should know about before getting started.
Save and Plan Your Contingency Reserves
Fannie Mae offers good advice about adding a contingency reserve to your budget. A contingency reserve is a specific amount of money set aside for the project to cover “unforeseen repairs or deficiencies that are discovered during the renovation.”
Fannie Mae says the contingency reserve ideally covers costs, including labor and materials, permits, and inspections. For best results, expect to save or acquire up to 10% of the project's total cost.
Setting the Budget Means Being Realistic
An important thing to know about budgeting for a rehab loan or construction project is that you won’t be able to rely on the bare minimum amount of cash to get by.
Construction projects typically face some cost overruns or problems related to higher expenses.
These can happen in the form of delays caused by bad weather, supply chain problems, or issues with waiting out permit approvals. Did supply chain woes force you to choose alternative materials to build with that cost more?
Did one phase of the renovation project take longer than expected? You could face these issues once the work gets underway. You will likely be disappointed if you don’t anticipate these problems and try to make a budget with razor-thin margins.
Set a budget that anticipates these problems. We cover how to do so in the next section.
Don’t Assume
Budgeting for your project means including all the necessary expenses, including those that some assume (wrongly) aren’t needed.
For example, you should still pay for a home inspection on a brand-new home. There is no way to tell that a defect or issue lurks in the newly built home without having an independent third party come in to review.
You may also need to pay for pest control services, flood zone determination, or other costs some borrowers don’t have to deal with. It’s wise not to assume these expenses won’t apply to you.
FHA, VA, and USDA: One-Time Close LoansWant More Information About One-Time Close Loans?
We have done extensive research on the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
FHA.com provides information and connects consumers to qualified One-Time Close lenders to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
Please note that investor guidelines for the FHA and VA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs, including but not limited to: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes, Dome Homes, Bermed Earth Sheltered Homes, Tiny Homes, Accessory Dwelling Units, or A-Framed Homes.
Contact Us: Send Us Your Request – Spam Safe
Please send your email request to [email protected] which authorizes FHA.com to share your personal information with one mortgage lender licensed in your area to contact you.
1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $1,500,000 and review higher loan amounts on a case-by-case basis. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.
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