We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
Building a new home can be an exciting but challenging process. Getting approved for financing is often one of the biggest hurdles for hopeful home builders. Luckily, FHA loans offer a great option for financing new construction homes with more flexible requirements than conventional loans.
In this comprehensive guide, we’ll break down everything you need to know about FHA new construction loans, from start to finish.
What is an FHA New Construction Loan?
An FHA new construction loan is a government-backed mortgage insured by the Federal Housing Administration (FHA). It allows you to buy land, build a home from the ground up, and get permanent financing all rolled into one loan.
Unlike conventional construction loans, FHA new construction loans require just a 35% down payment They also allow lower credit scores starting at 500. These features make new construction more accessible, especially for first-time home buyers.
With an FHA new construction loan, you get a single loan with a single closing. The loan starts out as a construction loan, with funds disbursed in stages as building progresses. Then once construction is complete, it converts to a permanent traditional FHA mortgage.
FHA New Construction Loan Requirements
While FHA new construction loans are more lenient than conventional options, you still need to meet certain borrower, property, and lender requirements to get approved. Here are the key eligibility criteria:
Borrower Requirements
- Minimum credit score of 500
- Maximum debt-to-income ratio of 43% (50% with compensating factors)
- At least 3.5% down payment (10% if credit score is 500-579)
- 2 years of stable income/employment
Property Requirements
- Single family homes, condos, or manufactured housing
- Must be used as your primary residence
- Located in an FHA-approved area
Lender Requirements
- FHA-approved lenders only
- Builder must be approved by lender
In addition to meeting these requirements, you’ll need to provide all necessary documentation, such as pay stubs, tax returns, and a purchase agreement.
The FHA New Construction Loan Process
Getting an FHA new construction loan involves several key steps from start to finish:
-
Find and secure land: You can use land you already own, purchase new land, or place land under contract contingent on getting financing.
-
Get pre-approved: Work with an FHA lender to get pre-approved and confirm your loan amount. This helps set your construction budget.
-
Select a builder: Your builder must be approved by the lender and experienced with FHA new construction loans.
-
Finalize plans: Submit your final home plans and specifications to the lender for approval.
-
Close on the loan: After the land, plans, and builder are all approved, you can close on the construction loan.
-
Begin construction: The lender will release funds in installments at certain milestones. You make interest-only payments during this phase.
-
Complete construction: Once building is done, the lender does a final inspection. Your loan converts to a traditional mortgage.
-
Make permanent payments: You begin making principal and interest payments amortized over the full loan term.
While the process involves many steps, an FHA lender will guide you through the entire new construction loan process.
Finding an FHA Construction Loan Lender
The most important step is finding the right FHA-approved lender familiar with new construction loans. While these mortgages are backed by the government, you still need to go through a private lender.
Look for lenders that:
- Have experience with FHA new construction financing
- Can walk you through the process from start to finish
- Have in-house builder approval and inspection capabilities
- Offer construction draw management services
- Provide speedy processing and closings
Working with the right lender makes a huge difference in how smooth the building process will be. Take time to shop around and compare multiple lender options.
FHA New Construction Loan Costs
FHA new construction loans have the following costs:
Interest rate – Usually slightly higher than rates for traditional FHA loans. Rates vary based on market conditions.
Mortgage insurance – Upfront 1.75% of loan amount plus 0.85% annual, paid monthly. Removed once you reach 20% home equity.
Closing costs – Application and underwriting fees, appraisal, inspections, taxes, title charges, etc. Typically 2-5% of loan amount.
Construction interest – You only pay interest on disbursed funds during the building phase.
Inspection fees – Paid to inspector chosen by lender at various construction milestones.
While costs are involved, you get the convenience of wrapping everything into one loan with a low down payment. Shop for the best rates and closing costs when choosing your lender.
FHA New Construction Loan Rates
FHA new construction loan rates are generally a little higher than rates for traditional FHA loans. Here are some typical rate ranges:
- 30-year fixed: 4.5% – 5.75%
- 15-year fixed: 3.75% – 5.25%
Actual rates you’ll qualify for depend on factors like your credit score, debt-to-income ratio, down payment amount, and market conditions. The best way to find current rates is to get personalized quotes from multiple lenders.
Alternatives to FHA New Construction Loans
An FHA-backed new construction loan isn’t your only option. Here are a few alternatives to consider:
-
Conventional construction loans – Require higher credit and down payments but have lower rates.
-
USDA construction loans – 100% financing for low-income borrowers in rural areas.
-
VA construction loans – No down payment required for veterans. Limited availability.
-
203(k) rehab loans – Finance renovations to an existing home up to $35,000.
-
Two-close construction loans – Separate short-term construction loan and permanent mortgage.
Look at the pros and cons of each to decide which construction loan best fits your needs and financial situation.
The Bottom Line
The bottom line is that FHA new construction loans offer a great financing solution if you want to build a home but have limited funds for a down payment. They provide low down payments, flexible credit guidelines, and the simplicity of a one-close loan.
Just be sure to find an experienced FHA lender to guide you through the multi-step process. And don’t forget to shop around for the best rates, terms, fees, and service. With the right loan program and lender, you’ll be well on your way to turning your dream home into a reality.
How does a construction loan work? Construction loans aren’t like regular mortgages. They typically last for one year, during which time the lender releases payments, usually directly to your contractor. The lender enlists an inspector to evaluate the project at various stages, and releases more funds once everything checks out. Once construction is finished, the loan either converts to a traditional mortgage or the borrower obtains a mortgage to pay it off.
- FHA construction-to-permanent loan: An FHA construction-to-permanent loan finances the ground-up construction of a home — including the purchase of the land or lot — then converts to a regular FHA mortgage. This is also known as a one-time or single-close loan; you won’t have to pay closing costs for two separate loans.
- FHA 203(k) rehab loan: An FHA 203(k) loan finances the cost of buying an existing home plus renovations and repairs. There are two types of 203(k) loans: a standard 203(k) for renovations costing $35,000 or more; and a limited 203(k) for smaller-scale, less expensive projects. Either option allows you to obtain one loan to buy and fix up a home, instead of two loans.
What is an FHA construction loan?
An FHA construction loan is a type of FHA loan used to build a home. It works like a conventional construction loan by providing short-term financing for a range of construction costs, from the architect’s fee to the certificate of occupancy. Often, borrowers convert these loans to long-term mortgages once the house is built.
Unlike conventional construction loans, however, FHA construction loans are insured by the FHA. That means if you have a down payment of at least 3.5 percent, you could qualify for the loan with a credit score as low as 580.
FHA One Time Close Construction Loan Explained 2024
FAQ
How does FHA define new construction?
What credit score do you need for a FHA construction loan?
When a buyer finances a newly built home with an FHA loan, what does the FHA require the builder to do?
How long do you have to live in a building after an FHA 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 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.
How do I qualify for an FHA construction loan?
To qualify for any FHA loan, you’ll need to meet the following criteria, at minimum: On top of these requirements, FHA construction loans require satisfactory documentation detailing the construction or renovation project, including information about the contractor you plan to work with.
What changes to HUD’s financing policy for FHA new construction loans?
Changes to HUD’s maximum financing policy for FHA New Construction loans includes, but is not limited to, the following: Eliminating Early Start Letter and Pre-Approval requirements. Consolidation of requirements regardless of loan-to-value. Including Form HUD-92544 Warranty of Completion as a requirement for all New Construction.