Can You Buy Just Land With An FHA Loan?

When it comes to real estate financing, FHA loans are one of the most popular options, especially for first-time homebuyers. With low down payments and flexible credit requirements, FHA mortgages make homeownership attainable for more buyers. But can you use an FHA loan to purchase just land without a home?

The short answer is yes, you can buy vacant land with an FHA mortgage, but there are important limitations borrowers need to be aware of. Keep reading to learn more about the rules and requirements for buying land with an FHA-insured loan.

FHA Loan Rules For Purchasing Land

The FHA allows borrowers to purchase land in conjunction with building a new home or installing a manufactured or modular home. However there are strict criteria the land must meet to qualify for FHA financing.

Here are the key requirements to be aware of:

• Building plans required – You must have immediate plans to build a home on the land. The FHA does not finance land purchases alone with no intent to build.

• Permanent structure – The home built must be attached permanently to the foundation and be considered real property, not a temporary structure.

• Primary residence – The home and land must be for your primary residence where you’ll live at least 9 months per year Investment properties don’t qualify,

• Land restrictions – The land cannot have environmental issues or other restrictions that limit its use and development,

• One transaction – The land purchase must be part of the same real estate transaction as the home construction and permanent mortgage financing.

• Time limits – Construction on the home must begin within 6 months of closing and be completed within 12 months in most cases.

Essentially, the FHA views financing land and a home together as one real estate purchase. Meeting all the eligibility criteria is key for approval.

What Land Can You Buy With An FHA Loan?

FHA loans give you flexibility in the type of land you can buy to build a home on, as long as it meets their basic requirements. Vacant land options may include:

• Raw land – Also called undeveloped land with no improvements at all yet.

• Partially cleared land – May have some trees/brush removed but lacks utility access.

• Fully cleared land – Land that is cleared, graded, and has utility hookups available.

• Rural land – Property in rural locations can be financed. Must have legal road access.

• Large acreage – No limits on acreage size, as long as zoning allows residential use.

• Your existing land – You can use an FHA loan to build on land you already own if it meets eligibility standards.

The key is making sure the land is suitable for building a home based on environmental factors, access, zoning laws, and other FHA criteria.

Land and Property Restrictions To Be Aware Of

While FHA land and construction loans give you flexibility, there are some property restrictions you’ll want to look out for:

• Wetlands – Land containing federally protected wetlands is ineligible.

• Flood zones – Properties in high-risk Special Flood Hazard Areas (SFHA) likely won’t qualify.

• Zoning issues – Land zoned for commercial or industrial use is prohibited. Must be residential.

• Easements – Limitations like shared driveways or utility easements can cause issues.

• Setbacks – Zoning rules may limit how close you can build to property lines.

• HOAs – Homeowners’ association rules may impact development plans.

• Environmental factors – Lands with high radon, poor drainage, or other issues may not be FHA approved.

• Deed restrictions – Limitations recorded on the deed can prevent certain types of construction.

• Nearby nuisances – Proximity to things like industrial areas, high traffic roads, airports, or railroads may disqualify the property.

Taking the time to research land limitations and restrictions is critical before purchasing with FHA financing.

The FHA One-Time Close Construction Loan Process

When buying land and building with an FHA loan, you’ll go through what’s called the FHA One-Time Close construction loan process. Here’s a basic overview of how it works:

• You select qualified land and choose house plans.

• Apply and get approved for an FHA One-Time Close loan based on the total estimated cost.

• At closing, you’ll receive a single loan covering the land purchase and construction.

• An escrow account is set up to fund construction payments as work is completed in stages.

• Once construction is finished, the loan automatically converts to a permanent FHA mortgage.

• You’ll make one regular monthly payment covering principal, interest, taxes and insurance.

The single-close program lets you handle the entire land purchase and home building with one FHA loan and one closing. This streamlines the process.

Pros and Cons of Buying Land With an FHA Loan

Using an FHA mortgage to buy land and build a custom home offers several advantages:

Pros

• Low 3.5% down payment requirement

• Available to buyers with lower credit scores

• Finance land purchase and construction costs in one loan

• Lock in interest rates for the permanent mortgage upfront

• Only one loan closing needed

Potential Cons

• Stricter land and property eligibility standards

• Construction must be completed quickly within 6-12 months

• Limited flexibility to change builders or plans after closing

• Monthly mortgage insurance premiums required

• More complex process than buying an existing home

Carefully weighing the pros and cons can help you decide if financing land and building with an FHA loan is the right choice.

Alternatives to FHA Land and Construction Loans

An FHA One-Time Close loan isn’t your only option for buying land and building a home. Some other choices include:

• Conventional construction loans – Require higher credit scores but may have lower rates.

• USDA loans – For low-income borrowers building in rural locations.

• VA loans – For eligible military homebuyers. Allow 100% financing.

• Portfolio loans – Non-conforming loans some lenders offer that are more flexible.

• Owner financing – Some sellers provide their own in-house land and construction financing.

• Personal loan – Can provide funds for a land down payment if you have enough homebuilding funds.

Talking to both a real estate agent and a loan officer can help you fully understand your options for land financing.

Tips for Buying Land With an FHA Mortgage

If you’ve decided an FHA One-Time Close loan is the right solution for purchasing land and building a home, here are some tips:

• Find land that meets all FHA property requirements to avoid issues.

• Research and understand any restrictions on the land through the deed, zoning laws, etc.

• Have house plans ready to submit to the lender showing what you intend to build.

• Find an experienced builder familiar with FHA construction timelines and draw requirements.

• Get quotes from multiple lenders to compare costs since fees can vary.

• Get pre-approved so you’re ready to make an offer when you find the right land.

• Ask the lender what happens if construction delays extend beyond the FHA completion deadlines.

• Be conservative with your construction budget and leave a buffer in case costs run over estimates.

With proper planning and research, buying land and building with an FHA loan can help make your dream home a reality!