FHA Loans: New Development Vs. Present Development?
What is the difference between a new building and an existing building? For the purpose of an FHA home loan, the distinction can be important, even if it is only a procedural level. The FHA loan manual (HUD 4000.1) makes important differences between new home and existing home loans.
FHA home equity loans for existing construction properties
The FHA defines existing building characteristics very specifically:
“Existing construction refers to a property that has been 100 percent completed for more than a year or was completed for less than a year and was previously inhabited.”
The appraisal requirements for existing structures are not quite the same (in terms of timing, paperwork, and required forms), but the question that affects a typical borrower most is how to use the appraisal.
Appraisals are NOT a tool for the borrower. You cannot use an FHA assessment or the results of a compliance check (which are ordered when corrections are required as a condition of loan approval) to determine if the home is “safe to buy”.
Borrowers should plan to organize and pay for the optional, but critically important, home inspection to determine if the home is suitable for purchase.
For existing home loans, the timing of your home inspection will not be the same as for a new home loan, but one thing is certain; a borrower should not be committed to buying a home without a home inspection result.
FHA home equity loan for new build properties
FHA loans can be approved for FHA One-Time Close Home Loans (also known as construction-to-permanent loans), which are for homes built from scratch.
There are other types of home loan (with two applications and two completion dates), but for those who want a single application and completion date, the FHA One-Time Close Home Loan is an option worth exploring.
Define new building
The FHA loan rules in HUD 4000.1 define “New Build”. “New build refers to planned building projects, properties under construction, and properties that have been in existence for less than a year, as defined below:
- Proposed construction refers to a plot of land that has not placed concrete or permanent material. The digging of foundations is not considered permanent.
- Under Construction refers to the period from the first placement of permanent material to 100 percent completion without a Certificate of Use (CO) or equivalent.
- Present in less than a year refers to an item that is 100 percent complete and less than a year from the date the CO or equivalent was issued. The property must never have been inhabited. “
The “existing less than a year” label is important – the house should not be sold as an “existing building” if it does not meet the above requirements for existing construction including the above “never inhabited” condition.
Additional assessment requirements apply to new build apartments, depending on when the assessment was completed. According to HUD 4000.1:
“If the new building is less than 90% complete at the time of the appraisal, the appraiser must document the floor plan, the plot of land and the exhibits that are required to determine the size and degree of completion. When the new build is 90% or more complete, the appraiser must document a list of the components that will be installed or completed after the assessment date. “
This is important because, depending on when the valuation was made, certain conditions may not be observable that will determine whether the property meets the FHA’s Minimum Ownership Requirements (MPRs) and Minimum Real Estate Standards (MPS):
“If the appraiser cannot determine that a property meets the FHA’s MPR or MPS, a qualified person or legal entity inspection may be required. Conditions that require inspection by a qualified individual or company include:
- Standing water on the foundation and / or basement that is too damp;
- Hazardous materials on site or within improvements;
- Faulty or defective mechanical systems (electrics, plumbing or heating / cooling);
- Evidence of a possible structural failure (e.g. settlement or bulging foundation wall, self-supporting floor beams, cracked masonry walls or foundation);
- Evidence of possible pest infestation;
- Leaky or worn roofs; or
- Any other condition which, in the expert judgment of the expert, justifies an inspection. “