How Government-Backed Construction Loans Differ From Conventional Loans
March 18, 2024
The banks that operate conventional construction loan programs have a variety of rules and requirements depending on who you use.
Still, one thing among all these lenders is common--for conventional loans, it's the rules of the bank that apply in addition to state/federal regulations.
These lenders do not have an overseeing federal agency that regulates the specifics of their construction loan programs outside of typical banking law.
Borrowers applying for government-backed mortgages soon learn that FHA and VA One-Time Close loans have additional requirements that must be followed.
Federal Law governs Conventional Loans
That’s not to say these banks are not regulated by federal law. Still, the government doesn't guarantee the loan programs they offer and doesn’t have any FHA, VA, or USDA guidelines for approval, payment, and administration of conventional construction loan programs.
Instead, those conventional options are guided by the law and corporate policy.
This is not so when applying for a one-time close mortgage offered by the FHA, VA, or USDA. These loan programs have specific guidelines unique to each agency.
The USDA program, for example, has a need-based element, and borrowers who don’t meet the “need” rules for USDA construction loans aren’t approved for them.
VA and FHA construction loans do not include a need-based loan approval requirement.
FHA, VA, and USDA Construction Loan FICO Score Rules
Some government-backed mortgages, including construction loans, technically permit potential borrowers to qualify with FICO scores as low as 500. The FHA loan program is a good example.
According to the FHA, a 500 FICO score isn’t left out of the running for loan approval. But on paper according to One-Time Close lender standards, those FICO scores are likely required to be in the mid 600 range instead.
What’s on paper from the VA, USDA, and FHA won’t override lender standards in this area.
Not all lenders will say no to (certain) lower FICO scores, but they will offer you higher rates in return for taking the risk of lending you the money for your new home.
A construction loan has an elevated risk for the lender even with the government guarantee made by the FHA, VA, or USDA, and your lender’s requirements are adjusted accordingly.
You can buy down those higher rates if the lender allows you to purchase discount points. Still, construction loans are a different type of purchase and not all lenders may be willing to discuss allowing lower FICO scores in exchange for buying discount points.
Property Type Rules
You can use a government-backed construction loan to build a home to live in and on paper, do so with up to four living units in mind. But the reality at the lender’s level is that single-unit homes typically get greenlit while multi-family units do not.
To build an income-generating property, you must seek a different construction mortgage and may be asked to pay higher rates. FHA and VA construction loans are for homeowners, not investors.
Want More Information About One-Time Close Loans?
We have extensively researched 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 with the guidelines for their products. We can connect you with mortgage loan officers who work for lenders who know the product well and consistently provide quality service.
If you would like to be contacted by a licensed lender in your area, please respond to the questions below. All information is treated confidentially.
OneTimeClose.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 allow for single-family dwellings (1 unit)—NOT for multi-family units (no duplexes, triplexes, or fourplexes).
In addition, the following homes/building styles are not allowed under these programs: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
Contact Us: Send Us Your Request – Spam Safe - FHA / VA One-Time Close
Please send your email request to [email protected] which authorizes OneTimeClose.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 is an eligible veteran, 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 VA 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.
Still, one thing among all these lenders is common--for conventional loans, it's the rules of the bank that apply in addition to state/federal regulations.
These lenders do not have an overseeing federal agency that regulates the specifics of their construction loan programs outside of typical banking law.
Borrowers applying for government-backed mortgages soon learn that FHA and VA One-Time Close loans have additional requirements that must be followed.
Federal Law governs Conventional Loans
That’s not to say these banks are not regulated by federal law. Still, the government doesn't guarantee the loan programs they offer and doesn’t have any FHA, VA, or USDA guidelines for approval, payment, and administration of conventional construction loan programs.
Instead, those conventional options are guided by the law and corporate policy.
This is not so when applying for a one-time close mortgage offered by the FHA, VA, or USDA. These loan programs have specific guidelines unique to each agency.
The USDA program, for example, has a need-based element, and borrowers who don’t meet the “need” rules for USDA construction loans aren’t approved for them.
VA and FHA construction loans do not include a need-based loan approval requirement.
FHA, VA, and USDA Construction Loan FICO Score Rules
Some government-backed mortgages, including construction loans, technically permit potential borrowers to qualify with FICO scores as low as 500. The FHA loan program is a good example.
According to the FHA, a 500 FICO score isn’t left out of the running for loan approval. But on paper according to One-Time Close lender standards, those FICO scores are likely required to be in the mid 600 range instead.
What’s on paper from the VA, USDA, and FHA won’t override lender standards in this area.
Not all lenders will say no to (certain) lower FICO scores, but they will offer you higher rates in return for taking the risk of lending you the money for your new home.
A construction loan has an elevated risk for the lender even with the government guarantee made by the FHA, VA, or USDA, and your lender’s requirements are adjusted accordingly.
You can buy down those higher rates if the lender allows you to purchase discount points. Still, construction loans are a different type of purchase and not all lenders may be willing to discuss allowing lower FICO scores in exchange for buying discount points.
Property Type Rules
You can use a government-backed construction loan to build a home to live in and on paper, do so with up to four living units in mind. But the reality at the lender’s level is that single-unit homes typically get greenlit while multi-family units do not.
To build an income-generating property, you must seek a different construction mortgage and may be asked to pay higher rates. FHA and VA construction loans are for homeowners, not investors.
Want More Information About One-Time Close Loans?
We have extensively researched 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 with the guidelines for their products. We can connect you with mortgage loan officers who work for lenders who know the product well and consistently provide quality service.
If you would like to be contacted by a licensed lender in your area, please respond to the questions below. All information is treated confidentially.
OneTimeClose.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 allow for single-family dwellings (1 unit)—NOT for multi-family units (no duplexes, triplexes, or fourplexes).
In addition, the following homes/building styles are not allowed under these programs: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
Contact Us: Send Us Your Request – Spam Safe - FHA / VA One-Time Close
Please send your email request to [email protected] which authorizes OneTimeClose.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 is an eligible veteran, 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 VA 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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