Can I Buy Land With An FHA Loan? A Guide to Buying Vacant Land

Buying vacant land to build your dream home on can be an exciting prospect However, financing raw land purchases can be tricky, especially for buyers with limited funds for a down payment This is where FHA loans can potentially help. But can you really buy land with an FHA loan?

The short answer is yes – under certain conditions, FHA loans can be used to purchase vacant land either to build a new home or as part of the purchase of an existing home. However, there are some important requirements and restrictions to be aware of.

In this comprehensive guide we’ll explain everything you need to know about using FHA financing to buy land. including

• What types of FHA loans allow land purchases
• Requirements for buying land with an FHA loan
• How the process works from start to finish
• Pros and cons to weigh
• Alternatives if FHA won’t work for you

Let’s dive in and find out what it takes to buy your dream lot or acreage with an FHA-backed mortgage!

What Types Of FHA Loans Allow Land Purchases?

The main type of FHA loan that can be used to buy vacant land is the FHA construction-to-permanent loan, also called the FHA one-time close loan. This loan is designed for home buyers who want to purchase land and build a new home on it from the ground up.

Here’s a quick rundown of the two FHA loan programs that permit land purchases:

• FHA Construction-to-Permanent Loan – This one-time close loan can finance both the purchase of land and the construction of a new home on it. Once construction is complete, the loan converts to a permanent FHA mortgage.

• FHA 203(k) Purchase and Renovation Loan – The FHA 203(k) loan allows buyers to purchase a property needing repairs and use loan funds for renovations. This can include buying vacant land with a dilapidated home to renovate or demolish.

The key is that both of these FHA loan programs require you to build or renovate a home on the property you purchase. The FHA will not finance the purchase of vacant land alone that will remain vacant.

FHA Land Loan Requirements

If you want to buy land with FHA financing, your land purchase must meet certain requirements set by the FHA. Here are some of the key criteria to be aware of:

• Must build a home on the land – As mentioned, the FHA requires that you build a home on the vacant land within a certain timeframe, typically around 12 months. They generally won’t finance land being held for future development.

• Must be for your primary residence – To qualify for FHA financing, the home you build or renovate on the land must be your primary residence where you live at least 9 months per year. Vacation homes or rental properties aren’t eligible.

• FHA loan limits apply – There are maximum FHA loan limits based on the size of the home and the county it’s located in. Your total loan amount for purchasing the land and building costs cannot exceed these limits.

• Minimum down payment of 3.5% – The required down payment for FHA loans is just 3.5%. However, a higher down payment may improve your chances of approval if your credit score is marginal.

• Must meet income and credit requirements – To qualify for an FHA loan, you’ll need a minimum credit score of 580 and a debt-to-income ratio below 43%. Higher scores can secure better rates.

As long as you meet these parameters, the FHA should have no issue financing your land purchase as part of a construction loan or renovation mortgage. But you’ll need to follow their rules closely to ensure approval.

The Process Of Buying Land With An FHA Loan

If you’ve decided an FHA construction or renovation loan is the right fit to buy and build on vacant land, here’s a step-by-step overview of the typical process:

1. Find the land – Search for and select the vacant lot or land you want to purchase. It must meet FHA requirements.

2. Get pre-approved – Work with a lender to get pre-approved for an FHA construction-to-permanent or 203(k) loan in the estimated amount you’ll need.

3. Make an offer – Make an offer to purchase the land you’ve chosen and negotiate terms with the seller.

4. Hire a contractor – Line up a qualified general contractor who has experience with FHA construction loans and can provide a fixed-price contract.

5. Submit plans for approval – Work with your contractor to draw up construction plans and specifications for the home and submit them for FHA approval.

6. Complete the loan process – Provide all required documentation to your lender to underwrite and approve the FHA mortgage based on the sales contract, plans, and contractor bid.

7. Close on the loan – At closing, the purchase of the land and construction costs will all be rolled into your single FHA loan. Construction can then begin!

8. Make payments – During construction, you’ll make interest-only payments on the loan proceeds disbursed to date. Once the home is finished, the loan converts to a traditional mortgage with principal and interest payments.

It’s a lengthy process with many steps, but following it carefully is the key to successfully buying land and building your FHA-financed dream home!

The Pros And Cons Of Buying Land With FHA Loans

Using an FHA construction or renovation loan to purchase land offers some nice perks:

Pros:

• Low 3.5% down payment requirement
• Single loan and closing for land purchase and construction
• Fixed interest rate and payments for the life of the loan
• More flexible credit standards than conventional loans

However, there are also some potential drawbacks to note:

Cons:

• Stricter requirements for property, plans, and contractor
• Limited flexibility in project design or changing builders
• Higher upfront fees and mortgage insurance premiums
• Potential construction delays that increase total loan costs

Weighing these pros and cons will help you determine if an FHA land loan is your best option or if a different type of financing may better suit your needs and budget.

Alternatives To FHA Loans For Raw Land Purchases

If you don’t qualify for an FHA loan or would prefer a different financing option, here are a few other ways to buy and build on vacant land:

• Conventional construction loans – These loans offered by private lenders allow land purchases and have higher credit and income requirements than FHA loans. Down payments are typically at least 20%.

• Owner financing – The property seller may agree to finance the purchase directly, often at better terms than banks. This avoids bank qualifying and allows faster land purchases.

• Cash purchase – If you can pay for the land outright in cash, you’ll have the most flexibility and can later obtain separate construction financing.

• Personal loans – Banks, credit unions, and online lenders may offer personal loans to finance your land purchase, which are then repaid in fixed monthly payments.

• Home equity loans – Existing homeowners can tap home equity to extract cash for a land down payment, if sufficient equity exists.

Carefully comparing all your options will help you find the right financing strategy to buy, build on, and ultimately achieve your property ownership dreams!

The Bottom Line

Yes, buying vacant land is possible with an FHA construction or renovation loan provided you follow their guidelines – but it’s not as simple as financing raw land alone. The key is understanding the FHA’s requirements upfront, finding land that aligns with their criteria, and being prepared to build and move into a new home on the land within a reasonable timeframe. If you can accomplish this, an FHA loan can be a great way to finance both your dream lot and brand new home with a lower down payment. Just be sure to consider both pros and cons as well as alternative financing options to make sure it’s the best solution for your needs.