The flexibility of an FHA mortgage is often underappreciated. Many homebuyers are surprised to find that FHA loans can be used to finance a variety of property types, including new builds.
FHA new construction loans are a good option for any homebuyer who isn’t able or willing to make a large down payment on a home. For as little as 3.5% down, qualified buyers can take advantage of FHA’s competitive rates and inclusive credit score requirements to fund the construction of their new home.
If youre considering using an FHA loan for new construction, it’s important to know what to expect.
Any FHA new construction loan will require the builder to provide a set of documents including a certification for plans and specs, wood destroying insect report, and a warranty of completion of construction. Homes with a well or septic tank will require additional health and safety reports.
Beyond that, the exact FHA construction loan requirements will depend on a few factors, including the type of property and the stage of the project.
Buying a newly constructed home can be an exciting experience Working with a builder gives you the opportunity to customize your perfect home from the ground up. However, financing new construction comes with its own set of requirements and considerations This is especially true when using an FHA loan.
FHA loans are a popular option for first-time homebuyers and those with lower credit scores thanks to lenient qualifying guidelines and low down payment options But FHA financing also imposes additional regulations around new construction to protect homebuyers and minimize risks for the lender,
In this comprehensive guide, we’ll explore everything you need to know about securing an FHA loan for new construction, including:
- Overview of FHA new construction loans
- Benefits of using an FHA loan for new construction
- FHA requirements for new construction
- The construction process with an FHA loan
- Tips for choosing a lender and builder
- Alternatives to FHA new construction loans
What is an FHA Loan for New Construction?
An FHA loan for new construction allows you to buy land, finance construction costs, and obtain a permanent mortgage all wrapped into one loan. These government-backed mortgages are issued by FHA-approved lenders and insured by the Federal Housing Administration.
With an FHA new construction loan, you’ll go through a streamlined process with a single application and closing The loan will initially function as a short-term construction loan, with funds disbursed in phases as building progresses.
Once construction is finished, the loan converts to a permanent FHA mortgage. This consolidation saves you the hassle of arranging separate financing and can result in significant cost savings.
Key Benefits of FHA Loans for New Construction
FHA new construction loans offer several unique advantages:
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Low down payment: Only 3.5% is required, compared to 5-20% on conventional loans. This greatly improves affordability.
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Lenient credit requirements: You may qualify with a credit score as low as 500 using manual underwriting. The minimum FICO is 580 with automated approval.
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No second loan or closing: The construction loan converts to a permanent mortgage in one streamlined process.
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Mortgage insurance: FHA loans require mortgage insurance premiums to protect the lender, but this allows more flexible approval guidelines.
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Oversight: FHA oversight throughout construction ensures the home is built properly to completion. This provides added reassurance.
For buyers with limited funds or less-than-perfect credit, FHA new construction loans can make homeownership achievable. The single-close structure also provides convenience.
FHA Requirements for New Construction Loans
While FHA new construction loans offer flexibility, they also come with stricter requirements than conventional mortgages. It’s important to understand these key criteria:
Borrower Requirements
As the buyer, you must meet certain FHA standards:
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Credit score: The minimum FICO score is usually 580. Some lenders may approve scores as low as 500 with a manual underwrite.
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Down payment: At least 3.5% of the total loan amount. Gifts can be used for some of the down payment in many cases.
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Debt-to-income ratio: Your total monthly debt payments should not exceed 43% of gross monthly income.
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Mortgage insurance: Upfront and annual mortgage insurance premiums are mandatory. This protects the lender.
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Homebuyer education: First-time buyers are required to complete a homebuyer education course.
Meeting these requirements ensures you are financially qualified and ready for homeownership. FHA loans are less strict than conventional mortgages, however.
New Construction Property Requirements
The property itself must also meet FHA criteria:
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Eligible property types: The FHA allows single-family homes, condos, and manufactured homes. Duplexes to fourplexes may also qualify.
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Mandatory inspections: Thorough inspections at multiple stages of construction are required, performed by a qualified third-party inspector.
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New home warranty: Builders must provide a 10-year warranty to cover any defects in materials or workmanship.
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Limit on cash back: Any leftover funds after construction must be applied to your mortgage principal. You cannot take cash-back.
These measures offer protection and minimize risks associated with new construction.
Builder & Contractor Requirements
FHA new construction loans also impose requirements around builders and contractors:
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FHA approval: All contractors must be licensed and approved to work with FHA loans. They must carry proper insurance as well.
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Minimum experience: Builders and contractors must have at least 2-3 years of experience with similar projects.
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FHA certifications: Certain contractors require special FHA certifications depending on the type of work being performed.
Vetting builders thoroughly gives you added reassurance that your home will be constructed properly.
The FHA New Construction Process
Now that you understand the requirements, let’s walk through the typical process of securing an FHA new construction loan:
1. Find land to build on
You can purchase vacant land, land you already own, or buy land under contract to be paid off at closing.
2. Select a qualified builder
Research builders with FHA experience and don’t be afraid to ask for referrals and references.
3. Get pre-approved for an FHA loan
Work with a lender early to get pre-approved and confirm you meet all requirements. Shop around to compare options.
4. Finalize building plans
Your loan amount will be based on the appraised value of the completed home. Work with your builder to finish the home design.
**5. Complete the loan application and underwriting **
Provide all required documentation to your lender to proceed through underwriting and secure loan approval.
6. Close on the construction loan
At closing, you’ll sign documents and the lender will establish a construction escrow account to disburse payments to your builder as work is completed.
7. Construction period
FHA inspectors will visit the site at different phases to ensure construction quality and safety standards are met.
8. Conversion to permanent loan
Once construction is finished, the loan seamlessly converts to a traditional FHA mortgage, and you begin making principal and interest payments.
While the process involves many steps, your lender will guide you through each stage. The benefit is streamlined financing with one loan, one closing, and FHA oversight for your protection.
Tips for Choosing an FHA Lender and Builder
Two of the most important choices you’ll make are selecting your lender and builder. Here are some tips:
Lender tips:
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Find a lender who frequently handles FHA new construction loans. Ask for referrals from real estate agents and past customers.
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Compare interest rates, fees, and closing costs from multiple lenders. Look for the best overall value.
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Opt for a local direct lender if possible. They can provide more personalized guidance and quick access when needed.
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Review the lender’s qualifications, certifications, years in business, and customer satisfaction ratings.
Builder tips:
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Look for a builder experienced with FHA requirements and timelines. They should willingly provide referrals.
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Search builder forums for feedback and reviews from past clients.
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Ask to see examples of the builder’s previous projects that are comparable to your home.
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Review the builder’s certifications, insurance, licensing, and credentials. Are they a member of the National Association of Home Builders?
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Request an itemized price breakdown and get all project expectations in writing before signing a contract.
Doing your due diligence helps set your new construction project up for success.
Alternatives to FHA Loans for New Construction
While FHA new construction loans offer many perks, they aren’t the only financing option. Some alternatives to consider include:
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Conventional construction loans – Require better credit (680+ score) and more cash (10-20% down payment) but offer lower rates.
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VA loans – Offer 0% down payment options for qualifying veterans. Can be used for new construction.
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USDA loans – Backed by the U.S. Dept. of Agriculture and designed for moderate income borrowers in rural locations. Also feature 0% down programs.
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State/local construction loan programs – Research programs in your area, which are often geared toward community development and helping first-time homeowners get started.
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HomeStyle Renovation – Fannie Mae’s loan for buying and renovating existing homes. Can be used for renovations up to 75% of the “as completed” home value.
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Renovation mortgages – Offered by some banks and credit unions to both purchase and renovate a home with one loan.
Shop around and compare mortgage options to find the best fit for your financial situation and goals
Single-Family Housing and Condo Requirements
The FHA requires potential homebuyers to supply different documents depending on the type of residence being constructed.
For proposed construction, one of the following must be provided:
- Copies of the building permit and certificate of occupancy
- 3 inspections: footing, framing and final. Must be performed by an FHA roster inspector or equivalent local authority
- A 10-year warranty and final inspection performed by an FHA roster inspector or equivalent local authority
For a property under construction, buyers must supply:
- Copies of the building permit and certificate of occupancy
- A 10-year warranty and final inspection performed by an FHA roster inspector or equivalent local authority
For an existing home:
- Copies of the building permit and certificate of occupancy
- A 10-year warranty and final inspection performed by an FHA roster inspector or equivalent local authority
- Appraisal confirming the property is 100% complete
The required documents change slightly with manufactured homes.
For proposed construction, buyers must supply at least one of the following:
- An initial and final inspection by an FHA roster inspector
- An initial and final inspection by the certifying engineer or architect
- A 10-year warranty issued by an FHA roster inspector, certifying engineer or architect
For properties under construction, buyers must provide:
- A 10-year warranty and final inspection performed by an FHA roster inspector, certifying engineer or architect
For an existing manufactured home:
- A 10-year warranty and final inspection performed by an FHA roster inspector, certifying engineer or architect
What is an early start letter?
An early start letter allows construction to begin before a plans and specs appraisal has been completed on a proposed new build. The lender can choose to issue an early start letter at the builder’s request only if the project already has a permit and a case number.
FHA One Time Close Construction Loan Explained 2024
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.
Can I build a home on land if I’m FHA approved?
Once you’re approved for a loan, you can use the proceeds to buy land. Most plots are acceptable, however, FHA construction loan rules don’t allow you to build a home on land if it’s near: 3. Choose a licensed contractor or builder FHA construction loan guidelines require you to work with a licensed contractor or builder.
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.