Could Home Loan Reform Expand Your Construction Loan Options?

The federal government is considering ways to reduce bias in the home-buying process. And one area in particular being scrutinized? Appraisals.

The appraisal is a process where the home is reviewed to ensure it meets minimum standards and meets state/local building codes. It’s also the way the lender establishes the fair market value of the property.

For a One-Time Close construction loan, the appraisal process works a bit differently than for existing construction property. But there is one thing both types of mortgage loans have in common--the use of comparables to help determine the appraised value of the home.

Comparables May Complicate Your Loan

The home you want is appraised on its own merits but also on how it measures up to the comparables. And that is one reason why you may find it hard to locate a single-close lender who offers a construction loan for a barndominium or a tiny house; there just aren’t enough of those comparables that may be used under current mortgage industry practices. Could appraisal reform change all that?

It is a question with an answer that remains to be seen, but in the meantime, some in the mortgage industry are already making moves to end bias or the appearance of it.

One company, Black Knight, started reviewing its appraisal process to identify bias; Black Knight upgraded their automated appraisal system to address the issue. Comparables, as part of the appraisal process, may involve viewing photos of the sale property compared to other properties, for example. 

The National Association of Realtors reports that an agency called the Appraisal Institute “recently added a five-hour seminar focused on addressing unconscious bias, updated its code of ethics, and created a practice guide affirming that appraisers should ignore ethnographic and other personal characteristics in property appraisals.”

And lest we think that’s just the actions and policies at a single company, it should be known that Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency have all identified racial bias in the purchase and refinance process. Black Knight’s move should be seen as the first of many industry changes to the appraisal process in general.

What It Means For Those Who Want To Build A Home

Appraisal reform brings the potential for other changes. Could the changes to how the industry approaches the use of comparables make it possible to build a non-traditional type property like a tiny house, barndominium, or solar-powered home? 

As mentioned above,  many single-close lenders won’t allow these types of properties because of the comparables issue--there just aren’t enough tiny homes or barndominiums in the housing market to make a fair valuation--as the rules are written now. Changes to those rules may also change the way lenders approach a kit home, solar-powered home, etc.

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 with 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.

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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) – and 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. 

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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 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.