You want to build or renovate your own home, but need FHA financing. Will the FHA let you be your own contractor? It depends on the situation. Here we look at the construction-permanent loan as well as the FHA 203K loan.
Read our guide below to help you decide if doing your own work is the right choice.
Guidelines for the Construction-Permanent Loan
Building your own home requires funding up front. But, most lenders won’t provide permanent financing until they have collateral. Enter the construction-to-permanent loan. The FHA provides you with two loans in one.
The construction loan provides the funds to build the home. This short-term loan helps provide funds for supplies and labor. The labor typically must come from a licensed contractor. However, in some cases the borrower can do the work.
The only way you can do the work is if you are a licensed, general contractor. You must provide everything someone you hire to do the work must supply. This includes the license and insurance to do the work. In addition, you must prove you have the time to complete the job within the allotted time frame – typically 1 year.
Be prepared for many inspections throughout the process as well. This would happen even if you hired someone else to do the work. The lender allows distribution of funds only after specific inspections are completed. Each lender has a different schedule. Talk to them about your plans to determine the exact distribution schedule for your home.
Guidelines for the FHA 203K loan
The FHA 203K loan provides funds for existing homes in need of renovations. You can use it to purchase or refinance a home. Generally, they provide the funds for the purchase/refinance plus the cost of approved renovations. Again, the FHA is under the assumption you will hire someone to do the work.
If you are a licensed, general contractor, you may do the work upon lender approval. The FHA allows you to do the work if you can prove the necessary qualifications. This includes:
- Proof of experience
- Proof of license
- Proof of time available to complete the project within 6 months
- Proof of possession of appropriate tools (the lender can only supply funds for supplies)
Whether you can be your own contractor is up to the lender, though. You may need to shop around to find a willing lender. The FHA 203K loan is already risky for lenders. They provide you funds for an amount greater than the current value of the home. If you do the work yourself, the lender takes an even greater risk. If you stop the work, the lender stands to lose money.
Increasing Your Chances of Approval as the Contractor
Whether you build or renovate a home, lenders have a serious risk when you are the contractor. If you want to increase your chances of approval, you need compensating factors. A few examples include:
- High credit score – The higher your credit score, the lower your risk of default. Showing financial responsibility lets lenders know you are less likely to walk away from the job, leaving the lender with a loss.
- High down payment or equity – The more money you have invested in the home, the less risk you pose to the lender. Making a higher down payment than the standard can help. It shows the lender you are serious about the home.
- Low debt ratio – The lower your debt ratio, the more likely you are to make your mortgage payments. Showing lenders you are financially responsible helps them trust you more.
- Stable employment/income – Showing long-term employment and increasing income again shows lenders you are not a high risk. Someone that hops from job to job frequently is more likely to default on their loan.
Should you be the General Contractor?
Now the question is, should you be the general contractor for your home? It sounds like a dream come true. You get financing to build your own home. But, it comes with its downsides. Consider the following:
- You must be very detail oriented. The lender will track every detail of the process. You must be able to provide proof of all work and financials. Because you must handle both sides of the finances as the owner and the builder, it can get tedious.
- You must understand all building codes and laws in your area. Again, lenders must inspect every stage of the home building/renovations. If you are unfamiliar with the requirements in your area it could leave you with serious consequences.
- You must have the time! This is a big one. Lenders work on a specific timeframe. You must be capable of handling delays and figure out how to sidestep serious issues quickly. If you work a full-time job, it may be impossible to complete the work on time.
However, if you have the qualifications and the time, it could work in your favor. You save money on labor and build/renovate the home just the way you like it.
Consider all aspects of being your own general contractor. Once you decide it is for you, shop around. First, find a few lenders willing to let you do the work. Once you do, compare the offers. Chances are you will find differing offers from several lenders. The risk is high, but some lenders are willing to take the chance more than others.