Need to pay for a major kitchen remodel? Or maybe you need to buy land and fund the construction of an entirely new home. An FHA construction loan could help. First, you need to understand how this type of home loan works and how it differs from a standard FHA loan.
Weâll review that in this article, and then dive into the requirements for FHA new construction loans.
The Federal Housing Administration (FHA) offers two types of construction loans that can help you build a new home or renovate an existing property These government-backed loans make home construction and renovations more accessible and affordable for borrowers
What is an FHA Construction Loan?
An FHA construction loan allows you to finance the building of a new home or the rehabilitation of a fixer-upper under one loan. There are two main types:
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FHA Construction-to-Permanent Loan This loan covers the purchase of land, construction costs, and the eventual permanent mortgage in a single closing. Once construction is complete, the loan converts to a traditional long-term FHA mortgage.
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FHA 203(k) Rehab Loan: This loan lets you roll remodeling costs into your mortgage to repair, upgrade, or convert an existing property. There’s a 203(k) loan option for minor repairs and one for major renovations.
The FHA insures these loans, so lenders can offer financing to borrowers who may not qualify for conventional construction loans. FHA construction loans make it possible to build and renovate with lower credit scores and smaller down payments.
FHA Construction Loan Requirements
To qualify for an FHA construction loan, you must meet certain criteria:
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Credit Score: Minimum 500 credit score required. With scores of 580+ you only need 3.5% down.
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Down Payment: 10% down required with 500-579 credit scores. 3.5% down with 580+ scores.
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Debt-to-Income Ratio: Maximum 50% debt-to-income ratio in some cases, 43% in most cases.
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Loan Limits: Loan amount cannot exceed FHA lending limits for your county.
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Cash Reserves: Expect to have 3-6 months of mortgage payments in reserves.
Meeting these requirements allows you to take advantage of low down payment options and flexible credit standards offered by FHA construction loans.
How to Get an FHA Construction Loan
Follow these key steps to get an FHA construction loan:
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Get pre-qualified or pre-approved by an FHA lender. This shows you how much you may qualify for.
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If buying land, identify a property and get under contract. Make sure the site meets FHA requirements.
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Select a licensed general contractor or home builder experienced with FHA loans.
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Get an FHA appraisal to ensure plans meet Minimum Property Standards.
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Close on the construction loan once approved and start your project!
Throughout construction, loan funds are dispersed in phases as work is completed. Talk to your lender to understand the draw schedule and process.
Pros and Cons of FHA Construction Loans
Pros
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Low down payments, starting at 3.5%
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Available with credit scores as low as 500
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One loan for construction and permanent financing
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Streamlined process for building or renovations
Cons
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Require mortgage insurance premiums
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Stricter limits on loan amounts
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More requirements than conventional loans
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Potentially more complex process
While FHA construction loans offer nice perks, they aren’t right for everyone. Weigh the pros and cons when deciding if it fits your home construction plans.
Alternatives to FHA Construction Loans
If an FHA construction loan isn’t the right fit, consider these alternatives:
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Conventional Construction Loans from banks and builders
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VA Construction Loans for eligible military borrowers
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USDA Construction Loans for low-to-moderate income borrowers in rural areas
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Renovation Mortgages like Fannie Mae HomeStyle loans
Each option has its own criteria, so review requirements carefully before applying. An experienced loan officer can help you pick the optimal loan for your situation.
Where to Get an FHA Construction Loan
Not all lenders offer FHA construction loans, so finding one may take some work. Here are some tips:
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Check HUD’s list of FHA-approved lenders and search by state.
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Ask brokers and real estate agents for local lender recommendations.
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Search online for lenders advertising FHA construction loans.
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Interview a few lenders and ask about their experience with these loans.
Taking time to find an experienced FHA construction lender can make the financing process much smoother. Be picky to find a lender that’s the right fit.
The Bottom Line
Yes, FHA does offer construction loans! These mortgages let you build or renovate with low down payments and flexible qualifying criteria. While FHA construction loans have more requirements than conventional options, they open doors for underserved borrowers. Connect with an FHA lender to see if you may benefit from these unique construction financing products.
How Does A One-Time Close FHA Construction Loan Work?
Ready to apply for an FHA construction loan, either a construction-to-permanent or 203(k) mortgage? Hereâs what you can expect.
Alternatives To FHA New Construction Loans
FHA-insured construction loans arenât your only choice to finance the construction or renovation of a home. You can turn to several alternatives â some of these options are also insured by a government agency.
You can fund a new home construction with a VA construction loan â a mortgage insured by the U.S. Department of Veterans Affairs (VA). The main benefit of a VA construction loan is that you donât have to make a down payment at all. The catch? Not everyone can qualify for a VA loan. You must be an eligible veteran or active-duty member of the U.S. Military, or an eligible spouse, to qualify for a VA construction loan.
The U.S. Department of Agriculture (USDA) offers its own construction-to-permanent loan. Like a VA loan, you wonât have to provide any down payment when taking out a USDA construction loan. The challenge here, though, is that not everyone can qualify for one of these loans, either. You must be buying or building a home in an area that the USDA considers rural. To find out whether the land on which you want to build is eligible, check the USDAâs property eligibility site.
FHA One Time Close Construction Loan Explained 2024
FAQ
Can an FHA loan be used to build a house?
What is the difference between a construction loan and a FHA loan?
What is the minimum FICO score for a construction loan?
Is a construction loan a good idea?
What is an FHA construction loan?
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.
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.
Do I need an FHA construction-to-permanent loan?
The one you’ll need depends on whether you’re building a home or buying an existing home that needs renovations. An FHA construction-to-permanent loan covers the costs of buying land and building a home. Once the construction of your home has finished, your lender converts the construction loan to a permanent loan.
What are the different types of FHA construction loans?
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.