Can You Build a House With an FHA Loan?

An FHA construction loan can help you realize your dream of creating your forever home from the ground up, even if you have less-than-perfect credit. As long as you can make a 10% down payment, you may qualify for an FHA construction loan with a credit score as low as 500. Here’s what you need to know about this unique financing option.

The FHA loan program offers home financing options for buyers looking to purchase an existing home But did you know you may also use FHA financing to build a new home from the ground up?

An FHA construction loan allows borrowers to finance the construction of a new home while taking advantage of the low down payment and flexible credit requirements of a government-backed mortgage If you want to build your dream home but don’t have the upfront cash, an FHA construction loan could make it possible

Overview of FHA Construction Loans

The Federal Housing Administration (FHA) insures several types of mortgages used to finance new construction:

FHA construction-to-permanent loan A single-close loan that finances the purchase of land and construction of a new home The loan converts to a permanent FHA mortgage once construction is complete,
FHA 203(k) rehab loan: Finances the purchase and renovation of an existing property. Can also be used to tear down and rebuild.
FHA One-Time Close loan: Similar to the construction-to-permanent loan, this option is only available in certain areas.

The main benefit of an FHA construction loan is that you can qualify with a credit score as low as 500 and down payment as little as 3.5%. FHA construction loans also allow for flexible sources for your down payment.

FHA Construction Loan Requirements

Here are the basic eligibility requirements for FHA construction financing:

Credit score: 500 minimum with 10% down, or 580 with 3.5% down
Down payment: As low as 3.5% of the total loan amount
Debt-to-income ratio: Typically 43% or less
Loan limits: Varies by county, up to $970,800 in high-cost areas
Mortgage insurance: Required on all FHA loans

For new construction, lenders will also want to review your building plans and specs. You’ll need a reliable contractor lined up and will have to stick to an approved budget.

How to Get an FHA Construction Loan

Follow these steps when applying for an FHA construction loan:

Get pre-qualified. Confirm you meet FHA requirements before house hunting.
Find land/lot. Work with a real estate agent to identify land or a lot suitable for building.
Partner with a home builder. Get quotes and lock in pricing before submitting your loan application.
Submit plans for approval. Your lender will want to review blueprints, budgets, specs, etc.
Get fully approved. You’ll undergo full underwriting before loan closing.
Complete construction. Your lender will release funds in stages based on inspection reports.
Convert to permanent mortgage. Once the home is finished, your construction loan converts to a traditional FHA mortgage.

Pros and Cons of FHA Construction Loans

Pros:

Low down payment options
May qualify with lower credit scores
One loan finances the entire project
Lock in mortgage rates for the permanent loan upfront

Cons:

More complex process than buying an existing home
Strict budget oversight during construction
Higher interest rates than conventional loans
Must pay mortgage insurance for life of loan

Alternatives to FHA Construction Loans

An FHA construction loan isn’t your only option for building a new home. Here are a few other choices:

Conventional construction loans have higher credit and down payment requirements but no ongoing mortgage insurance.
VA loans offer 100% financing and flexible credit guidelines for veterans and service members.
USDA loans provide 100% financing for low-income borrowers in eligible rural areas.
203(k) loans allow you to finance renovations when purchasing a fixer-upper.
Home equity loans leverage your existing home equity to fund construction projects.

The Bottom Line

Yes, you can use an FHA loan to build a new home! FHA construction loans make it possible even if you don’t have perfect credit or a large down payment. Just be prepared for extra steps compared to buying an existing house. As long as you have a reliable contractor and stick to your approved budget, an FHA construction loan can help you build your dream home.

Don’t forget: Lock in your interest rate during construction

Your interest rate may change while your home is being built. Discuss mortgage rate lock options with your loan officer and ask these questions:

How much could rates change during construction?
When can I lock my rate during the FHA loan process?
What will the rate be on my permanent mortgage?
Can I float down a rate if it’s lower after my home is built?

What is an FHA construction loan and how does it work?

An FHA construction loan is a mortgage that allows you to roll in the costs of building a home or renovating an existing property. There are two types of FHA construction loans:

The FHA construction-to-permanent loan allows you to build a home from scratch. You can use it to buy land, finance construction costs and cover lender fees.

This loan combines the features of a short-term construction loan with a standard, long-term FHA loan. You’ll close once and finance the build the same way you would with any other construction loan. When construction is complete, the loan automatically converts to a permanent mortgage.

Here are the steps you’ll take when financing a home with an FHA construction-to-permanent loan:

1. Get preapproved for an FHA loan

You’ll need to meet with a lender and have them perform a preliminary review of your credit history, income and assets. Once that’s done, you’ll receive a conditional preapproval letter detailing how much money the lender may be willing to lend you once they’ve had a chance to verify your information.

2. Choose your land

Once you’re approved for a loan, you can use the proceeds to buy land. Most plots are acceptable, however, FHA construction loan rules don’t allow you to build a home on land if it’s near:

A gas or oil well
An airport
An area prone to floods

3. Choose a licensed contractor or builder

FHA construction loan guidelines require you to work with a licensed contractor or builder. The contractor may have to provide documentation to confirm they have the proper licensing and insurance.

4. Get a home appraisal

Your lender will order an FHA appraisal to confirm the building and materials meet FHA’s minimum property standards.

5. Close on the construction loan

If the appraised value is enough to cover your costs, you’re ready to close. If not, you may need to make up the difference or scale back your renovation plans.

6. Request draws as the work is done

As work is completed, the builder will be paid with your written authorization on the schedule you set before closing.

7. Switch to a permanent loan

Once your home is finished and move-in ready, the lender closes out your construction loan and converts it to a permanent mortgage within 60 days.

FHA One Time Close Construction Loan Explained 2024

FAQ

What is a good credit score to build a house?

Credit Score and Income Minimums Additionally, don’t make any large purchases in the months before you’re going to apply for a construction loan. Most lenders typically want a minimal credit score of 680 for the loan to be considered, some want the score to be 720 or better.

Will an FHA loan cover land?

Key takeaways. An FHA construction loan is a type of FHA loan that covers the cost of building a home, including the land or lot purchase, building materials and labor. There are two types of FHA construction loans: an FHA construction-to-permanent loan and a FHA 203(k) loan.

What is the minimum FICO score for a construction loan?

Minimum FICO score for construction loan: 580-640 Technically, 580 is the minimum fico score for construction loan. However, Mushlin says that in his experience, a higher credit score of at least 640 is usually needed for the FHA construction-to-permanent loan program.

How long do you have to live in a building after an FHA loan?

FHA Loan Requirements The home must be appraised and approved by an FHA appraiser. The appraisal must state that the house meets minimum property standards. You must move into the home within 60 days of the closing date. Borrowers must live in the property for at least 1 year.

Can you build a house using an FHA loan?

An FHA construction loan allows you to build a house from scratch or purchase and renovate a fixer-upper with a single loan. You also have the option to finance a permanent mortgage on the completed home.

Can I build a home on land if I’m FHA approved?

Once you’re approved for an FHA loan, you can use the proceeds to buy land on which to build a home. Most plots are acceptable, but FHA construction loan rules don’t allow you to build a home on land that is near certain prohibited sites (3). Choose a licensed contractor or builder to work with for your FHA construction project.

Is an FHA construction loan suitable for me?

An FHA construction loan could help pay for the project if you’d rather build a home than buy one. Like a regular FHA loan, this type of financing is insured by the Federal Housing Administration (FHA) and offered by FHA-approved mortgage lenders. Here’s how to get one. Should I get an FHA construction loan?

How can I get an FHA construction loan?

To get an FHA construction loan, you need to search for FHA lenders on the US Department of Housing and Urban Development’s (HUD) website. Not all FHA lenders offer construction loans, so you need to be patient and willing to shop around for the right mortgage company.