A borrower is eligible for maximum financing when he/she

• acts as a licensed general contractor and is building a home on land that he/she already owns or acquires separately, and
• receives no cash from the settlement.

When building on a borrower's own property, the appropriate LTV limits are applied to the lesser of the

• appraised value of the proposed home and land, or
• documented cost of the property.

The documented cost of property includes the following:

• the builder's price, or sum of all subcontractor bids and materials
• cost of the land (if the land has been owned more than six months or was received as an acceptable gift, the value of the land may be used instead of its cost), and
• interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property.

Equity in the land (value or cost, as appropriate, minus the amount owed) may be used for the borrower's entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85 percent of the appraised value.

Replenishing the borrower's own cash expended during construction is not considered as "cash back," provided that the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds used for construction.

In order to determine if a borrower has made the required 3.5 percent cash investment, or its equivalent in land equity when building on his/her own land, all such mortgage transactions must be summarized using only HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary.

Lenders are reminded that they must record the sum total of the documented cost of the property, including

• the builder's price, or the sum of all subcontractor costs, materials, etc.
• the cost of the land or, if owned for more than six months or was received as an acceptable gift, its appraised value, and
• interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property.

Additionally, the calculated loan-to-value ratio (which is to be the same value used when seeking a risk clarification from FHA's TOTAL), must reflect, as it does on other purchase transactions, the lesser of

• the sales price, or
• the appraised value.