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.
Buying land and building a custom home from the ground up is an exciting prospect for many homeowners. With today’s high home prices building new construction can be more affordable than buying an existing house in this market. But coming up with enough cash to cover land, materials, labor and other construction costs is a major barrier for most buyers. An FHA loan to build a house makes homebuilding attainable by rolling all your costs into one mortgage loan.
What Is an FHA Construction Loan?
An FHA construction loan combines short-term financing to build a home with a permanent FHA mortgage all in one loan. This allows borrowers with as little as 3.5% down to buy land pay for construction and end up with a long-term mortgage to pay off the costs over time.
FHA construction loans come in two main types:
-
FHA construction-to-permanent loan: For building a new home from the ground up on vacant land.
-
FHA 203(k) rehab loan: For renovating and repairing an existing home you are buying or already own.
Both loans are backed by the Federal Housing Administration (FHA), so you get flexible qualifying requirements but have to pay mortgage insurance
FHA Construction-to-Permanent Loan
With an FHA construction-to-permanent loan, you’ll go through a single closing and can roll the following costs into your total mortgage amount:
- Land purchase
- Construction materials and labor
- Architect and engineering fees
- Required building permits
- Utility hookup charges
- Lender fees for processing the construction loan
You’ll start with a short-term construction loan while your new home is being built. This phase typically lasts 6-12 months. The lender disburses payments to your builder in pre-determined stages (called construction draws) as progress is made.
Once construction is complete, the loan automatically converts to a permanent FHA mortgage. Your loan terms and monthly payments stay the same.
FHA 203(k) Rehab Loan
If you want to take on a fixer-upper project, the FHA 203(k) mortgage can finance the purchase or refinance of a home plus renovations. Loan amounts can go towards:
- Remodeling or adding rooms
- Major repairs (roof, siding, plumbing, HVAC)
- Updating flooring, cabinets, fixtures
- Accessibility improvements
- Site improvements like patios, decks, landscaping
There are limits on the types of projects and how much you can finance based on the value of the home:
-
Standard 203(k): Renovations up to $35,000 are allowed on existing one- to four-unit homes.
-
Limited 203(k): You can finance more extensive renovations beyond $35,000 up to 75% of the home’s after-improved value.
An FHA consultant oversees the rehab process for standard 203(k) loans.
Benefits of an FHA Construction Loan
Compared to other construction loans, the FHA version offers homebuilders several advantages:
-
One closing: Avoid having separate construction financing and a permanent mortgage.
-
Low down payments: Only 3.5% down required if your credit score is at least 580.
-
Expanded options: FHA loans allow building from scratch or renovating.
-
Flexible credit requirements: Minimum 500 credit score to qualify.
-
Mortgage insurance: Required, but can be canceled once you build equity.
Qualifying for an FHA Construction Loan
While FHA construction loans are more accessible, you still have to meet certain criteria:
-
Credit scores: Minimum 500; 580 for 3.5% down payment.
-
Debt-to-income ratio: Max 50% with compensating factors, otherwise 43%.
-
Down payment: At least 10% down if score is 500-579; 3.5% if 580+.
-
Mortgage limits: Varies, but typically up to $970,800 for single-family homes in most counties.
You’ll also need enough savings and income to cover your down payment, closing costs, and estimated mortgage payment. Meeting with a lender early on is key to get pre-approved and confirm you qualify.
The Construction Loan Process
Follow these general steps to get an FHA construction loan and build your custom home:
1. Choose a Lot and Builder
Look for land zoned for residential building that meets FHA zoning guidelines. Only vacant properties are eligible; you can’t demolish an existing home.
Also pick a licensed general contractor to oversee your build. They should carry all required general liability and workers compensation insurance.
2. Find a Lender and Get Pre-approved
Shop around with FHA lenders in your area to compare rates and terms. Get pre-approved for a loan amount that covers the land purchase, construction budget, fees, and your down payment and closing costs.
Ask the lender about rate lock options so you can secure an interest rate before building starts. Rates often rise during the 6-12 months of construction.
3. Submit Plans and Get an Appraisal
You’ll need to provide the lender with the site plan, floor plans, elevation drawings, and estimated materials and labor costs. This allows them to order an FHA appraisal on the to-be-built home.
The appraised value must be high enough to support the loan amount you need. If not, you may have to adjust the construction plans.
4. Close on Your Construction Loan
At closing, you’ll sign the construction loan documents and the builder contract. Your down payment and closing costs are due. The lender will set up a construction draw schedule for paying the builder increments as work is completed.
5. Make Draw Payments During Construction
The lender will only release draw payments after inspecting the completed work. Your builder submits each draw request and required paperwork to the lender for review and approval.
Typical draw stages are:
- Foundation/footings complete
- Framing done
- Roofing, plumbing, electrical, HVAC finished
- Interior finished
- Final landscaping, driveway, etc.
6. Convert to Permanent Mortgage
Within 60 days after construction is finished, the lender converts the construction loan to a traditional 30-year FHA mortgage based on the final as-completed value.
Now you can move into your brand new custom-built home!
Alternatives to an FHA Construction Loan
An FHA-backed loan offers a convenient way to finance building a home with less money down. But it’s not your only option. Here are a few other types of construction loans to consider:
-
Conventional construction loan – Requires more down (10-20%) but no mortgage insurance.
-
VA construction loan – 100% financing for eligible veteran buyers.
-
USDA construction loan – 100% financing for low-income buyers in rural areas.
-
State/local construction loan programs – May offer down payment help and below-market rates.
-
Homestyle renovation mortgage – Renovate and finance with 3% down via Fannie Mae.
-
203(k) – Freddie Mac version of the DIY-friendly FHA rehab loan.
Most lenders also offer construction-only loans that must be paid off after building with separate permanent financing. This requires two separate closings.
Carefully weighing the pros and cons of each type of construction loan can help you identify the most affordable option. Consulting with a loan officer is key to pre-qualify and learn what you can afford.
FAQs About FHA Construction Loans
How much does an FHA construction loan cost?
FHA loans require:
-
Upfront mortgage insurance premium of 1.75% of the loan amount
-
Ongoing MIP of 0.45% – 1.05% of the loan amount annually
You also pay closing costs of 2% to 5% of the mortgage amount. FHA construction loans don’t have higher fees than other FHA loans.
Can I get an FHA construction loan with bad credit?
Yes, you can qualify for an FHA construction loan with a credit score as low as 500. But you’d need to make a larger 10% down payment instead of 3.5%.
What are lending requirements for FHA construction loans?
To qualify for an FHA construction loan, you’ll need:
-
Minimum 500 credit score (580 for 3.5% down)
-
Maximum 50% debt-to-income ratio
-
At least 10% down payment if score is 500-579
-
Loan amount below FHA lending limits
How long does it take to build a house with an FHA loan?
The construction phase with an FHA construction-to-permanent loan generally takes between 6 months to 1 year. Total time from loan approval through construction completion can be 12-18 months. The process is faster than getting two separate loans.
Can I get an
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.
FHA construction loan requirements
The qualifying requirements for an FHA construction loan are similar to those for standard FHA loans, but with a few additions.
To qualify for any FHA loan, you’ll need to meet the following criteria, at minimum:
- Credit score: At least 580, or as low as 500 if putting down at least 10 percent
- Debt-to-income (DTI) ratio: No more than 43 percent (with some exceptions)
- Down payment: 3.5 percent with a credit score of at least 580, or at least 10 percent with a credit score between 500 and 579
- Loan limits: No more than the FHA loan limits for the year; for 203(k) loans, no more than the FHA loan limits, the home’s after-renovation value plus improvement costs or the home’s after-renovation value, whichever is less
- Mortgage insurance: Upfront and annual FHA mortgage insurance premiums, paid for the life of the loan in most cases
- Occupancy: Primary residences only
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. For a standard 203(k) loan, you’ll be assigned a 203(k) consultant to estimate the remodeling or repair costs.
Whether you get a construction-to-permanent or rehab loan, the work will also be subject to inspection as the project progresses.