Can You Buy Land With An FHA Loan?

Buying land to build your dream home can be an exciting prospect. With wide open spaces and total design freedom, you can create the perfect place to settle down and start a family. But land alone isn’t cheap, and securing financing through traditional lenders can be difficult without an existing structure as collateral.

This is where FHA loans come in handy. The Federal Housing Administration (FHA) provides several loan programs that make it possible to buy land and finance construction costs all wrapped up in one mortgage. But these loans come with specific requirements that determine whether you can use an FHA loan to buy land in the first place.

FHA Loan Programs That Allow Land Purchases

The FHA offers a few different loans that allow you to buy land in conjunction with building a home:

• FHA 203(k) Loan This program covers purchase and renovation costs on an existing home. You can buy a rundown house and use 203(k) financing for a full remodel. Some minor land improvements are also allowed, like grading for drainage issues.

• FHA Construction-to-Permanent Loan This single-close loan is ideal for buying land and building a new home from the ground up. It functions as a short-term construction loan and converts to a permanent mortgage once building is complete

• FHA One-Time Close Loan: Similar to the construction-to-permanent loan, this provides a single closing for land purchase, construction, and permanent financing. It consolidates the entire process into one FHA loan.

So in short – yes, you can buy land with an FHA loan as long as you use an eligible program and meet all the FHA requirements. But there are important limitations to understand before you apply.

FHA Loan Rules for Buying Land

The FHA allows land purchases under certain circumstances, but will not simply finance a vacant lot with no plans for development. According to the FHA Lenders Handbook, the property must include

• An existing home you plan to rehabilitate and occupy.
• A site with development plans to build and occupy a new home.
• Land necessary for the use and enjoyment of an existing or new construction home. For example, if purchasing a rural property with a home where several surrounding acres are included.

In all cases, the home must be for your own primary residence – investment properties or vacation homes do not qualify. And you must begin construction within a reasonable timeframe, usually around 6-12 months.

Land Purchase Restrictions

In addition to proving you’ll build and live on the property, the FHA has some other restrictions on land purchases:

• No vacant land loans – You cannot buy a vacant lot with plans to “sit” on it for an extended period before building. Construction should begin within months.

• Max acreage limits – The land purchase cannot be excessive for the area and must be proportional to the size of the home. Loan guidelines recommend no more than 5 acres, but additional acreage may be acceptable in rural locations.

• Limited improvements – You can only finance minor land alterations like grading, leveling, or basic utility access. Major improvements like installing septic systems must wait until after closing.

• Mandatory home size – To prevent buyers from building a tiny, low value home merely to obtain financing, the FHA enforces minimum home size standards based on the number of bedrooms.

• Max property value – As with all FHA loans, there are limits on the maximum appraised value of the property after improvements based on FHA mortgage limits.

The FHA Land Loan Process

If you’ve found a great vacant lot or acreage and want to move forward with an FHA land loan, here are the key steps in the process:

1. Research and Choose the Site – Consider zoning, deed restrictions, utilities access, and other factors before selecting your property. The land must be in a suitable location for building a home.

2. Get Pre-Approved – Work with an FHA lender early on to get pre-approved before making any offers. This verifies you qualify and determine your maximum loan amount.

3. Make an Offer – Your real estate agent can now submit an offer on your behalf. Remember the purchase must be contingent on securing an eligible FHA loan.

4. Secure Financing – Now that you have a property, formally apply for financing. Provide all required documentation to your lender to underwrite the land loan.

5. Complete Inspections – The lender will arrange for a site appraisal and any required geological surveys or water testing to ensure it’s buildable land.

6. Close on the Loan – At closing, you’ll provide the down payment and pay other upfront costs. The lender will hold the remaining funds to disburse through construction.

7. Finalize Plans and Build – Work closely with your lender throughout the design and construction process, providing all required documentation along the way.

8. Occupy the Home – The home must pass a final inspection before the lender officially converts financing to a permanent mortgage. Then you can move into your new home!

While the process involves extra steps compared to buying an existing house, an FHA land loan simplifies the complex process of buying land and building a custom home.

Alternatives to an FHA Land Loan

FHA loans provide one of the few options available for financing raw land to build on. But they aren’t necessarily the best choice for every home buyer. Consider these alternatives:

Conventional land loans – Bank and credit unions sometimes offer land loans to qualified borrowers. Often 20% down or more is required. Rates may be higher for unimproved land.

Owner financing – If purchasing land directly from a seller, owner financing is a possibility. The seller holds a mortgage secured by the property rather than a traditional lender.

All cash purchase – Those with sufficient cash reserves can buy land outright without any mortgage. But this ties up capital that may be needed for construction.

Personal loans – Banks and credit unions often make personal loans that can provide funds to purchase land. However, rates are usually much higher than a mortgage.

Home equity – If you have significant equity built up in an existing home, a home equity loan or line of credit can provide funds for a land purchase.

401K or IRA funds – In some cases, you may be able to use retirement savings to buy land without tax penalties. This should only be considered once all rules and restrictions are understood.

The Bottom Line

While buying vacant land with a traditional loan can be tough, FHA land loans provide a financing option for those who want to build a custom home. Just be sure to pick the right loan program, understand all requirements, and work with an experienced lender familiar with the unique process. With proper planning, you can use an FHA loan to secure your perfect lot and build your dream home from the ground up.