Building a new home can be an exciting and rewarding experience. However financing the construction can also be complex and confusing. That’s where new construction FHA loans can help. With more flexible credit requirements and lower down payments than conventional loans, FHA loans make new construction more accessible for many buyers.
But before you can reap the benefits, you need to understand the specific new construction FHA loan requirements. Meeting these guidelines is key to getting approved and making your dream home a reality.
In this comprehensive guide we’ll break down all the key eligibility criteria documentation, costs, and steps for securing an FHA-backed new construction loan.
New Construction FHA Loan Requirements: The Basics
An FHA new construction loan helps you finance building a home from the ground up It combines the features of a short-term construction loan and a permanent FHA mortgage into a convenient one-time close loan
With a new construction FHA loan:
- You only need one loan application and one closing
- The same loan covers purchasing land, paying construction costs, and converting to a permanent mortgage
- You lock in your long-term interest rate upfront
This streamlined process makes new construction more accessible. FHA loans offer:
- Low down payments, with just 3.5% down for buyers with a 580+ credit score
- More flexible credit requirements than conventional loans
- Lower mortgage insurance costs than other loan types
However, FHA new construction loans also have stricter eligibility standards to qualify. Meeting these requirements is crucial for approval.
FHA New Construction Loan Borrower Requirements
As the borrower, you must meet certain criteria to qualify for an FHA new construction loan, including:
Credit score: The minimum FICO credit score is 580 if putting down 3.5-10% or 500 with a 10%+ down payment. The higher your score, the better your chances of approval.
Debt-to-income ratio: Your total debt payments, including the future mortgage payment, cannot exceed 43% of your gross monthly income in most cases.
Down payment: At least 3.5% of the total loan amount. A 10% down payment is required for borrowers with credit scores between 500-579.
Income verification: You must document two years of steady income from employment or other sources. Self-employed buyers will need two years of tax returns.
First-time homebuyer status: The FHA does not require you to be a first-time buyer.Repeat buyers are eligible.
Homebuyer education: Completing an approved homebuyer education course can improve your chances of approval.
Bankruptcy: You must be at least two years removed from bankruptcy discharge to qualify.
Foreclosure: You must be three years removed from a foreclosure to be eligible.
Mortgage insurance: Upfront and annual mortgage insurance premiums are required.
Home occupancy: You must intend to use the home as your primary residence. Investment properties do not qualify.
Citizenship: You must be a U.S. citizen, permanent resident or have an eligible visa.
Homebuyer counseling: Receiving counseling from an approved agency can help your chances of getting approved.
Clearing these borrower benchmarks is essential for securing an FHA construction loan.
New Construction FHA Loan Property Requirements
In addition to borrower eligibility, the property itself must meet certain standards, such as:
- The home must be a single-family home or condo
- Townhouses and manufactured housing may also qualify
- Multifamily homes and non-residential properties do not qualify
- The home must be located in an FHA-approved area
- Loan limits vary by county but max out at $970,800 in the highest cost areas
The property will also be subject to required FHA appraisals and inspections at multiple stages, including:
- Land appraisal – Values the land itself
- Site inspection – Ensures proper soil analysis, surveys, etc.
- Foundation inspection – Verifies foundation is built to code
- Framing inspection – Checks framing meets standards
- Final inspection – Confirms home is complete and livable
Additionally, the project must adhere to HUD Minimum Property Standards and meet all applicable building codes. Satisfying these property conditions is a must.
Step-by-Step Process for Getting Approved
Now that you understand the baseline new construction FHA loan requirements, let’s walk through the overall process from start to finish.
Step 1: Find Land
The first step is locating and purchasing a suitable lot or land for your new home. You have a few options here:
- Use land you already own free and clear
- Buy land with a separate mortgage or private loan
- Place vacant land under contract contingent on securing financing
The property will need to appraise for at least the purchase price. An FHA-approved appraiser will evaluate the land value.
Step 2: Choose House Plans
Next, work with a builder and architect to design blueprints and floor plans for your new home. The home must adhere to HUD guidelines regarding minimum property standards and local building codes.
Your lender will review the plans to ensure they are acceptable. Don’t start any work before getting approval.
Step 3: Apply for Mortgage Pre-Approval
After selecting land and house plans, it’s time to apply for mortgage pre-approval. This involves:
- Completing a loan application with an FHA lender
- Providing documents to verify income, employment, credit history, down payment funds, etc.
- Undergoing underwriting to confirm you meet credit, income, and eligibility requirements
- Receiving a pre-approval letter with your maximum loan amount
Getting pre-approved in advance is highly recommended so you know what you can afford.
Step 4: Find an FHA-Approved Builder
Not just any contractor can build a home using FHA financing. The builder must be approved by the FHA connections process, which verifies they are properly licensed, insured, and experienced.
FHA lenders have lists of approved builders you can choose from. Make sure to find one familiar with FHA guidelines.
Step 5: Sign Contracts and Close on Land
Now you’re ready to finalize contracts with the seller of the land and your chosen builder.
The purchase agreement for the land should state that closing is contingent on obtaining FHA loan approval.
Once contracts are signed, you can close on the land purchase. Your lender will deposit the funds into an escrow account.
Step 6: Start Construction
After closing, the builder can break ground and start construction. The home must be completed within a certain timeframe, usually between 6-12 months.
The lender will release installments from the escrow account to the builder at various stages of completion. Release of funds is contingent on passing required inspections at each phase.
Step 7: Complete Construction and Final Inspections
As construction wraps up, the home must pass a final inspection by an FHA appraiser. This confirms the home is complete and meets HUD’s minimum property standards and applicable building codes.
Only after passing the final inspection can the home be approved for occupancy.
Step 8: Convert to Permanent Mortgage
Once construction is finished and the home is deemed livable, your new construction FHA loan can convert into a permanent mortgage.
This long-term mortgage has a fixed interest rate and 30-year loan term. You begin making regular principal and interest payments just as with a traditional purchase loan.
The single-close construction loan seamlessly converts to permanent financing with no second trip to the closing table.
Costs and Fees for FHA New Construction Loans
When budgeting for your new home build, be aware of the various costs and fees involved with an FHA-backed construction loan:
Down payment – At least 3.5% of the total loan amount, or 10% for borrowers with credit scores between 500-579.
Closing costs – Usually 2-5% of the total loan amount, including lender fees, appraisal cost, and more.
Upfront mortgage insurance premium (UFMIP) – 1.75% of the base loan amount. Added to the total loan.
Annual mortgage insurance premium (MIP) – 0.85% of the loan amount, paid monthly.
Interest rate – Rates run slightly higher than conventional construction loans but lower than other FHA loans.
Escrow – Funds are held in escrow and disbursed to the builder in draws as work is completed.
Inspection fees – FHA requires up to five inspections. Costs range from $200-$400 each.
Permits/fees – The cost of construction permits, surveys, soil tests and impact fees.
Lot premiums – Occur if the land is purchased above FHA-approved value. Requires a 10% down payment.
Contingency reserves – Up to 20% of construction costs set aside for unexpected overages.
Make sure you budget for these expenses when planning your new home
Pros and cons of FHA construction loans
Before deciding on an FHA construction loan, it’s important to weigh the pros and cons. Here’s what you should know about the benefits and limitations of FHA construction loans.
How to get an FHA construction loan in 4 steps
The FHA construction-to-permanent loan basically involves four steps, according to Money Avenue co-founder and president A. Donahue Baker.
FHA One Time Close Construction Loan Explained 2024
FAQ
Can you build a new house with an FHA loan?
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?
When building a new home when do you start paying mortgage?
What credit score do you need for a construction loan?
Lenient credit score requirements: The FHA construction loan is accommodating for borrowers with lower credit scores, accepting a minimum credit score of 500 with a 10% down payment. For scores of 580 or higher, the down payment requirement drops to 3.5%.
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 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.
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.