An FHA construction loan can help you realize your dream of creating your forever home from the ground up, even if you have less-than-perfect credit. As long as you can make a 10% down payment, you may qualify for an FHA construction loan with a credit score as low as 500. Here’s what you need to know about this unique financing option.
FHA construction loans allow you to build a new home or renovate an existing property with a low down payment. But not all lenders provide these loans insured by the Federal Housing Administration (FHA). So who offers FHA construction loans and how do you find the right lender?
I did some digging and have the details for you below. Keep reading to learn more about FHA construction loan lenders, loan options, requirements and how to get approved.
What Are FHA Construction Loans?
An FHA construction loan is financing that covers the cost of building a home or renovating an existing property. These loans come in two main forms:
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FHA construction-to-permanent loan This option lets you build a home from the ground up on land you already own or purchase The loan covers land acquisition as well as construction costs Once the home is built, it converts to a permanent FHA mortgage.
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FHA 203(k) renovation loan: The 203(k) loan lets you buy a fixer-upper property and fund renovations or repairs with the same mortgage. There are two versions — the standard 203(k) for major overhauls and a “limited” 203(k) for smaller projects.
In both cases, FHA construction loans offer lenient qualifying requirements like:
- A minimum credit score as low as 500
- A down payment as low as 3.5%
- Flexible debt-to-income (DTI) ratios
Because they’re insured by the FHA, lenders can offer these perks to borrowers they might otherwise turn down for financing.
FHA Construction Loan Lenders
You can only get an FHA construction loan through FHA-approved lenders. This includes:
- Mortgage banks and lenders like loanDepot, Guild Mortgage and Fairway Independent Mortgage
- Credit unions like Navy Federal Credit Union and State Employees’ Credit Union
- Online lenders like Better and Lenda
- Some community banks and thrifts
Not all FHA lenders offer construction loans, however. Your best bet is to check the U.S. Department of Housing and Urban Development (HUD) website, which lets you search approved lenders by state.
I’d start there and look for lenders that advertise construction loan options. Local banks and credit unions are also worth checking out.
FHA Construction Loan Requirements
To qualify for an FHA construction loan, you’ll need to meet all the standard FHA loan requirements. These include:
- A minimum credit score of 500 to 580, depending on your down payment size
- A debt-to-income ratio typically capped at 43%
- A down payment of at least 3.5% of the purchase price
In addition, FHA construction loans have a few extra requirements:
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Construction documents: Your lender will want to review detailed plans for the home you intend to build or renovations you’ll make. For a 203(k) loan, you’ll work with a consultant to estimate rehab costs.
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Inspections: The property will be inspected at various stages throughout the construction process before more funds are released.
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Contractor approval: You’ll need to work with a licensed general contractor approved by your lender.
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Loan limits: Your loan amount can’t exceed FHA limits and value thresholds for the year.
As long as you meet these stipulations, an FHA construction loan could help you build or renovate a home with a small down payment even if your credit isn’t perfect.
How to Get Approved for an FHA Construction Loan
Follow these steps when seeking an FHA construction loan:
1. Check and improve your credit score. FHA loans allow lower scores. But a higher score can help you qualify for better terms.
2. Save up a down payment. Lenders like to see 3.5% to 10% down for FHA loans. More is better to cover construction overages.
3. Find a lender. Search for FHA construction loan lenders in your state or area. Focus on those with good reviews.
4. Choose a contractor. Find a licensed general contractor with solid references to handle your build or renovation.
5. Submit loan documents. Provide all required paperwork to your lender, including construction plans.
6. Get preapproved. Your lender will preapprove you for financing based on your application, plans and contractor estimate.
7. Start construction. Once approved, select a closing date and break ground on your project. Your lender will release funds in stages.
8. Complete construction. Continue working with your contractor to finish the home build or renovations based on the approved plans.
9. Convert to a mortgage. For construction-to-permanent loans, your financing will convert to a permanent FHA mortgage once the home is finished.
With preparation and persistence, you can find and get approved for the FHA construction loan you need to turn your homeownership dream into reality.
Alternatives to FHA Construction Loans
FHA construction loans aren’t your only financing option if you want to build or remodel a home. Other possibilities include:
- Conventional construction loans from banks and mortgage lenders
- VA construction loans for veterans and service members
- USDA construction loans in rural areas
- Renovation loans like HomeStyle from Fannie Mae
- Home equity loans or lines of credit (HELOCs) if you have equity
- Cash-out mortgage refinancing to tap equity in your current home
Carefully compare all your choices to find the best loan for your budget and goals.
FAQ
Who offers the best FHA construction loans?
Some top lenders for FHA construction loans based on good rates, reviews and reputation include Guild Mortgage, loanDepot, Stonewater Mortgage, NBKC Bank and Fairway Independent Mortgage. But many local and regional lenders also offer excellent FHA construction financing options.
What credit score is needed for an FHA construction loan?
The minimum credit score for an FHA construction loan with a 3.5% down payment is 580. If you put down at least 10%, you could qualify with a score as low as 500. The higher your score, the better your chances of approval.
How much money do you need to build a house with an FHA loan?
An FHA construction loan requires at least a 3.5% down payment. So on a $300,000 home build, you’d need around $10,500 minimum. However, most experts suggest a 10% to 20% down payment on construction loans to cover cost overruns. Shop around for the best rate and terms for your budget.
Can I get an FHA construction loan for a manufactured home?
Yes, FHA loans can be used to finance the purchase of a manufactured or modular home and land. FHA construction loans may also be able to cover the costs of placing a manufactured home on land you already own.
The Bottom Line
FHA construction loans make building or renovating a home possible even if you don’t have perfect credit or a big down payment. Connect with FHA-approved lenders in your state to find the best financing option to fit your budget and goals. With a trusted lender and contractor, you can build your dream home.
Alternatives to an FHA construction loan
Your local bank or homebuilder may offer their own construction loans. When the home is finished, you’ll need to pay off the construction financing with a permanent loan. This is also called a two-time close construction loan, since you’ll close twice and pay closing costs on both loans.
Pros and cons of FHA construction loans
Provides flexible qualifying requirements: FHA accepts credit scores as low as 500, provided you’re able to make a 10% down payment. However, if your score is at least 580, you’ll only be required to put down 3.5%.
Offers the ability to do one closing: In more traditional financing scenarios, you’d have to take out two separate loans — a construction loan and a permanent mortgage. This means attending two closings and paying two sets of closing costs. With the FHA construction loan, you only have to go through the process once.
Gives options for multiple types of construction projects: Between the FHA construction-to-permanent loan for new builds and the FHA 203(k) program for fixer-upper homes, an FHA construction loan has you covered no matter what type of construction project you have in mind.
Requires mortgage insurance: FHA borrowers must pay two types of FHA mortgage insurance: an upfront fee worth 1.75% of the loan amount and an annual premium that costs between 0.15% and 0.75% of the loan amount. Unlike private mortgage insurance, this requirement can’t be waived once you build up more equity in your home.
Sets specific limits on your loan amount: The FHA sets annual limits on how much you’re able to borrow. For 2023, the limit for most areas is $472,030. However, it extends to $1,089,300 in select areas where the cost of living is much higher.
Imposes more requirements than other loan types: FHA construction loans come with more red tape than some other loan options. For example, the FHA appraisal sets specific health and safety requirements that aren’t typically found with conventional loans.