Can You Really Buy Land With An FHA Loan?

Buying land to build a dream home on can be an exciting prospect. However, coming up with the cash to purchase the land can be a major roadblock for many potential homeowners. This is where FHA loans can come to the rescue.

The Federal Housing Administration (FHA) has loan programs to help finance the purchase of land However, you can’t purchase land you intend to leave vacant — you’ll have to commit to building a home on the property or find land with a house already on it — and you’ll have to live in it as your primary residence

In this comprehensive guide, we’ll cover everything you need to know about using an FHA loan to buy land, including:

What Types of FHA Loans Allow Land Purchases?

There are two main FHA loan programs that allow you to buy land:

• FHA Construction-to-Permanent Loan This loan combines features of a construction loan and a traditional FHA mortgage into one It allows you to purchase land and finance the construction of a new home on that land,

• FHA 203(k) Loan This is a rehab loan that allows you to buy land with an existing home that needs renovating You can roll renovation costs into the total loan amount

Both loans provide a streamlined “one-time close” process so you don’t have to get separate loans for the land and eventual permanent mortgage.

What Are The Specific FHA Requirements For Buying Land?

The FHA has specific requirements when using their loans to purchase land:

• You must build a home on the land: The FHA will not finance the purchase of vacant land alone. You have to commit to building a home on the property.

• No commercial properties: The land and home must be for residential use only. FHA loans cannot be used to buy land for commercial development.

• Primary residence: You must intend to use the home as your primary residence when construction is complete. Second homes or investment properties don’t qualify.

• Borrower eligibility: You must meet general FHA borrower requirements regarding credit score, debt-to-income ratio, income documentation, etc.

• Property eligibility: The land and eventual home must meet FHA property standards regarding location, condition, appraised value, etc.

Meeting these requirements is essential for securing FHA approval to buy land.

Step-By-Step Process For Buying Land With An FHA Loan

If you’ve decided an FHA land loan is right for you, here is an overview of the process:

1. Get Prequalified

Before looking for land, meet with a lender and get prequalified for an FHA construction or 203(k) loan. This shows sellers you are a serious buyer and determines your affordability.

2. Find The Right Land

Search for land that meets FHA requirements regarding location, permissible structures, etc. If buying land with an existing home, make sure it’s a eligible property type for 203(k) financing.

3. Place Your Offer

Make an offer contingent on securing an FHA loan approval. This gives you an out if the lender denies your loan application later.

4. Complete Loan Application

Work with your lender to complete the full loan application and underwriting process. Now is when you’ll find out if you qualify.

5. Obtain Appraisal

The lender will order an appraisal to determine the market value of the land and the projected value of the home once constructed. This impacts loan approval.

6. Close On The Loan

At closing, you’ll finalize the land purchase and loan documents. Construction can begin after closing if you opted for the construction-to-permanent loan.

5 Benefits Of Using An FHA Loan To Buy Land

Beyond just the ability to buy land, FHA loans offer several other benefits:

1. Low Down Payments

FHA loans require just 3.5% down for buyers with credit scores of 580 and above. This low down payment makes land more affordable.

2. Below-Market Interest Rates

FHA loans typically offer lower interest rates compared to conventional loans, keeping payments down.

3. Limited Cash Needed

Beyond your down payment, you won’t need much cash up front with an FHA land loan since loan proceeds go toward buying the land.

4. One Loan For Everything

Construction-to-permanent and 203(k) loans let you buy land, build a home, and get a permanent mortgage with one loan.

5. More Flexible Credit Requirements

FHA loans are an option for buyers who may not have pristine credit or high incomes that conventional loans require.

4 Potential Drawbacks To Consider

FHA land loans offer many perks, but they aren’t perfect. Here are some potential cons to keep in mind:

• Strict Requirements: FHA requirements for land, property, and construction can be frustrating to navigate.

• Upfront Costs: You’ll have to pay an upfront mortgage insurance premium equal to 1.75% of the total loan amount. This is required for all FHA loans.

• Delayed Construction: Complying with FHA timelines and inspections can delay construction compared to conventional building loans.

• Mortgage Insurance: You’ll pay annual mortgage insurance on the loan for the life of the loan or until you reach 20% equity in the property. Conventional loans let you drop PMI sooner.

While FHA land loans provide many benefits, you have to determine if the pros outweigh any cons for your personal situation.

Alternatives To An FHA Land Loan

If an FHA loan ultimately isn’t right for you, here are a couple alternative financing options for buying land:

Conventional Land Loan

These loans are offered by private lenders. You’ll need excellent credit and a down payment of at least 20%, but they come with fewer restrictions on land use.

Owner Financing

Some land sellers provide their own in-house financing for buyers, which usually requires a higher down payment. Terms vary, so read the contract carefully.

Cash Purchase

If you can pay for land in cash from your savings, you avoid the whole loan process. But this option is only feasible for buyers with substantial funds.

Carefully weigh all your options before deciding the best route for purchasing your ideal land. An FHA loan provides a nice middle ground between affordability and flexibility.

Wrapping Up: Is Buying Land With An FHA Loan Right For You?

Purchasing land is an exciting step on the path to homeownership. FHA loans allow buyers with lower incomes or less-than-perfect credit to buy land at a reasonable cost and low down payment.

Just be sure you understand the program’s requirements and limitations. Buying vacant land for speculation or leaving property vacant after purchase aren’t allowed. The property has to become your primary residence within a reasonable timeframe after buying the land.

But for buyers who can’t afford a large down payment and are eager to build their first home, an FHA land loan can be an ideal solution. You get the land you need to start building your dream home without breaking the bank.