How Much Down Payment Do You Need for an FHA Construction Loan?

If you want to build your dream home from the ground up, an FHA construction loan can provide the financing to make it happen. With this type of loan insured by the Federal Housing Administration, you can get favorable terms like low down payments. But just how much can you expect to pay upfront with an FHA construction loan?

The FHA construction loan down payment, like other FHA loans, starts at just 3.5% of the total loan amount. This makes it one of the most affordable options for building a new home without needing to fork over a 20% down payment like you would with a conventional loan.

While 3.5% is the minimum needed to qualify for the best terms, you may want to consider putting down more if your finances allow. Here’s what to know about FHA construction loan down payment options requirements and tips for coming up with the cash to get your project started.

FHA Construction Loan Down Payment Requirements

The main criteria for down payments on FHA construction loans are:

• Minimum down payment is 3.5% of the total loan amount
• 10% down required for borrowers with credit scores between 500 and 579
• Maximum loan-to-value ratio is 96.5% of the lesser of the appraised value or the total cost to build
• Down payment funds must be from your own savings or gifts from family, not borrowed

As an example, if you needed a $300,000 construction loan to build a house, your minimum down payment would be 3.5% of $300,000, or $10,500.

This assumes you have the 580 minimum credit score needed for the lowest down payment on an FHA loan. If your score is below 580, you’ll have to put down at least 10% of the total loan amount.

The maximum loan-to-value ratio caps the loan amount at 965% of the home’s appraised value after construction. So if the appraisal came in at $350,000, for instance, the most you could borrow is 96.5% of $350,000 or $337,750.

Should You Put Down More Than 3.5%?

While 3.5% is the FHA minimum, there are a few reasons you may want to put down more if you can:

• Lower interest rate The larger your down payment the lower your rate may be since you’re borrowing less. Even a slight bump from 3.5% to 5% can help.

• Lower mortgage insurance: FHA loans require upfront and annual mortgage insurance premiums. The more you put down, the less you’ll pay over time.

• Added financial cushion: Construction projects often end up over budget. Having extra cash reserves can prevent you from needing to take out additional loans to complete the home.

• Faster equity buildup: With a larger down payment, you’ll start off with more home equity right off the bat.

As you can see, there are lots of benefits to exceeding the minimum FHA down payment if possible. Just remember, you can’t put down more than 96.5% of the home’s value.

Where to Get an FHA Construction Loan Down Payment

Once you know how much your FHA construction loan down payment needs to be, the next step is actually saving up the cash. Here are some common sources for down payment funds:

• Your personal savings account
• Checking, CD or money market accounts
• Cash gifts from relatives
• Proceeds from selling assets like stocks
• Your 401(k) or IRA via a limited-time withdrawal

One thing to note is you can’t count borrowed money toward your down payment, like funds from a personal loan or cash-out refinance. The down payment needs to be from your own assets or as a bona fide gift.

If you’re having trouble saving enough on your own, here are some tips:

• Set up automatic transfers from each paycheck to your savings account.
• Cut back discretionary spending for a set time period like 6 months.
• Earn extra income from a side gig or freelance work.
• Consider downsizing to reduce expenses long term.

The bottom line is that an FHA construction loan makes building a home more affordable thanks to low down payments starting at just 3.5%. While this is the minimum required, carefully consider your budget and goals to decide if putting extra down would be beneficial for you.