Land loans can help you buy property without any structures on it, especially when you don’t have immediate plans to build on the land. Whether you’re planning to build your dream house someday or buying a new location for your business, you might need a land loan to make it happen.
We’ll go over the basics of land loans, how they work and where to get them.
Buying land to build a home can be an exciting prospect However, it also comes with some financial challenges Land alone can cost tens of thousands of dollars or more. Then you need to factor in the expense of actually building the home. This is where an FHA loan can help make buying land and constructing a new home more affordable.
In this comprehensive guide, we’ll cover everything you need to know about using an FHA loan to buy land and build a home.
What is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. It is designed to help borrowers with lower credit scores or smaller down payments access home financing.
FHA loans require only a 3.5% down payment, whereas conventional mortgages typically need 20% down. FHA loans are provided by private lenders but insured by the FHA. This insurance protects the lender if the borrower defaults.
In exchange for the lower down payment and flexible credit requirements, FHA loans do require an upfront mortgage insurance premium and annual mortgage insurance premium However, once you build 20% equity in the home, you may be able to cancel mortgage insurance
Can FHA Loans Be Used To Buy Land?
Yes, you can use an FHA loan to purchase land to build a home on. The FHA offers a construction loan program that allows you to buy land, pay for construction costs, and secure a permanent mortgage all with one loan.
This is known as the FHA One-Time Close Construction Loan. It streamlines the process into a single closing and consolidates the land purchase, construction, and permanent financing into one FHA-insured loan.
What Are The Basic Requirements To Buy Land With An FHA Loan?
To qualify for an FHA land and construction loan, you must meet certain borrower eligibility standards:
- Credit Score: At least 580 FICO; 500+ may qualify with 10% down
- Downpayment: Minimum 3.5%
- Income/Employment: 2 years verified income; employed last 12 months
- Debt-to-Income Ratio: Below 43%
- Mortgage History: Current on any existing mortgage payments
- Bankruptcy: No bankruptcy in past 2 years
In addition to borrower qualifications, the land and property must meet FHA guidelines:
- Cannot have existing dwellings that need to be demolished
- Must be zoned for single-family residential use
- Site must be approved for water/sewer or have septic permit
- Maximum loan limit of $970,800 applies
The construction contractor must also be FHA-approved and licensed in your state.
How Does The FHA Land Loan And Construction Process Work?
Here is an overview of the typical FHA construction loan process from start to finish:
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Get Pre-Approved: Work with an FHA lender to get pre-approved and confirm loan amount.
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Find Land: Research and select land to purchase that meets FHA requirements.
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Submit Purchase Agreement: Make an offer and sign a purchase agreement for the land.
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Hire Contractor: Choose a licensed general contractor who is FHA-approved.
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Complete Loan Processing: Provide all required income/financial documents to lender.
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Appraisal and Inspections: FHA will review appraisal and inspect land.
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Loan Approval: Underwriting will review and approve the loan once conditions met.
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Closing: Sign loan documents and pay down payment; land purchase is completed.
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Start Construction: General contractor takes over the building process.
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Draw Disbursements: Loan funds dispersed in draws as construction hits milestones.
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Final Inspections: FHA performs final inspection when home is complete.
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Loan Conversion: Construction loan converts to permanent mortgage once home finished.
It’s a step-by-step process, but an FHA construction loan makes it smoother by consolidating everything into one loan.
What Are The Pros And Cons Of An FHA Land And Construction Loan?
Pros
- Low 3.5% downpayment
- Available with lower credit scores
- One loan for land, construction, and the mortgage
- Only one loan closing to save on fees
- Interest-only payments during construction
Cons
- More stringent requirements than conventional loans
- Monthly mortgage insurance premiums
- Must use licensed general contractor
- Maximum loan limits apply
- Potentially higher interest rate
While FHA construction loans require some tradeoffs, they allow borrowers with limited funds or credit challenges to finance the land purchase and building of a custom home.
What Are Some Alternatives To An FHA Loan For Land And Construction?
If an FHA loan doesn’t work for your situation, here are a few other options to consider:
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Conventional construction loans – Require 20% down and 680+ credit score but offer more flexibility.
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VA construction loans – Offer 100% financing for eligible veterans.
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USDA construction loans – 100% financing available in designated rural areas.
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Renovation loans – Fannie Mae and Freddie Mac offer home renovation loans that allow you to purchase and remodel an existing home with one loan.
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State/local construction loans – Some state and local governments offer construction loans or grants for first-time home buyers.
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Owner financing – If purchasing land from a private seller, you may be able to arrange owner financing for the land acquisition.
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Personal loan – Could potentially use a personal loan, retirement funds, or other assets to purchase land separately before obtaining a construction loan.
Shop around and talk to both FHA and conventional lenders to weight your construction loan options.
Finding The Right FHA Construction Lender
The first step is finding an FHA-approved lender that offers construction loans in your state. Not all FHA lenders do.
Things to look for when picking an FHA construction lender:
- Experience with FHA construction-to-permanent financing
- Ability to handle the entire end-to-end process
- Strong customer service and communication
- Competitive interest rates and fees
- Smooth processing and underwriting
- Familiarity with local builders
Getting quotes from multiple lenders can help you find the best FHA construction loan for your needs.
While the process requires careful planning, an FHA construction loan creates a path for buying land and building a home even with limited savings or credit challenges.
The single-close construction loan simplifies the financing process. And the low 3.5% down payment and flexible credit standards makes purchasing land and constructing a home affordable for more buyers.
Just be sure to work with an experienced FHA lender and general contractor to navigate the program requirements. If you’re ready to build your dream home, an FHA loan may help make it possible.
How do land loans work?
Like a traditional mortgage, land loans are secured by the property they purchase. This means that if you can’t make your mortgage loan payments, you could lose the land to foreclosure.
Land loans require you to make a down payment and you’ll repay the loan over time. However, unlike traditional mortgages, land loans typically have short repayment periods, ranging from two to five years. Because of this, they often come with a large balloon payment at the end.
Land loans can come from banks or credit unions, specialty lenders or government programs. However, they may be harder to find than a traditional mortgage because not every mortgage lender offers them.
VA land loan
VA loans are for eligible military service members and veterans and are guaranteed by the U.S. Department of Veterans Affairs (VA). You have two main options for financing land:
- The VA construction loan program lets you use a VA loan to buy land, but only if you’re going to later build a house on it. The land will need to be improved, meaning it can be accessed via paved roads and can be hooked up to basic utilities. The program is only open to people who want to fund a new build with a VA loan and will also use a VA loan to finance their new home after construction is complete.
- The VA farm loan program is for borrowers who want to purchase farm land that already has a home built on it.
See current VA mortgage rates.
FHA Loan for Land
FAQ
What disqualifies you from an FHA loan?
Can you use land as a down payment for a FHA loan?
Can an FHA loan be used to build a house?
Why do some properties not accept FHA loans?
Can you buy land with an FHA loan?
There are important considerations to make in such cases. FHA mortgages allow qualified borrowers to use the loan to purchase land, but there are some things to know before you get started. The FHA Lenders Handbook, HUD 4000.1, states that an FHA loan can be used to buy land and purchase a home at the same time.
Can you buy a house with an FHA loan?
The FHA Lenders Handbook, HUD 4000.1, states that an FHA loan can be used to buy land and purchase a home at the same time. What you can’t do with an FHA loan in such cases? Buy a plot of undeveloped land with no immediate plans to build.
Can you build a house with an FHA loan?
With an FHA construction loan, you have the flexibility to buy a parcel of land, build a home from scratch, finance a permanent mortgage on the completed home, or even purchase and renovate a fixer-upper, all with a single loan.
Can you buy land to build a house?
If you want to purchase land to build a house, you may be interested in an FHA construction loan. This is known as a “3-in-1 mortgage” or a construction to permanent loan. It finances the whole construction process as well as the purchase of the land. It also provides a permanent mortgage for your newly built home.