By LaToya IrbyHow to Get an FHA Construction Loan
Quick Answer
Getting an FHA construction loan involves working with an FHA-approved lender and licensed builder. Your builder will create construction plans and a cost estimate, which the lender will review based on FHA guidelines before approving the loan.
An FHA construction loan is a good option if you want to build a new home but don't have a perfect credit score or a large down payment. You can get an FHA construction loan by working with an FHA-approved lender. The complete loan process is more complex than with a traditional mortgage since it also involves home construction. Here's what you need to know about getting an FHA construction mortgage.
What Is an FHA Construction Loan?
An FHA construction loan is a mortgage insured by the Federal Housing Administration (FHA) that covers the cost of building a new home. Instead of getting separate loans for construction and the mortgage, the FHA construction loan combines both into one, with a single closing.
During construction, the loan works like a traditional short-term construction loan to pay for land, materials and contractor costs on a new home. After construction is complete, the loan converts to a standard FHA-insured mortgage.
How to Get an FHA Construction Loan
Here's what you can expect during the application process:
1. Choose Your Land
You can use the loan to buy land or build on land that you already own. If the land was gifted to you, your lender will verify that it meets FHA and gift requirements set by the U.S. Department of Housing and Urban Development (HUD).
2. Get Preapproved
You'll need to work with an FHA-approved lender who will review your credit score, income, estimated down payment and debt-to-income ratio (DTI), or the percentage of your monthly gross income that goes to debt payments. This helps determine how much you can borrow and what your construction budget will be.
Learn more: How to Get Preapproved for a Mortgage
3. Hire a Licensed Builder or Contractor
You'll need to work with a licensed general contractor approved by the lender. You may be able to act as your own builder if you're a licensed contractor. Make sure your builder is familiar with FHA property standards since these must be certified for your loan to be FHA-insured.
4. Submit Construction Plans and Budget
You'll have to provide architectural drawings, cost estimates and a timeline from your builder. Your lender will use these to determine whether your home meets FHA guidelines.
5. Get an Appraisal
The lender will order an appraisal that estimates your future home value after construction is complete. This estimate helps determine your maximum loan amount.
6. Close on the Loan
If you're approved, you'll sign all paperwork and officially close on the loan before construction begins. The loan funds are kept in escrow and released in phases as construction meets specific milestones.
Once the home is complete and passes inspection, the loan converts to a permanent mortgage and the lender submits the final paperwork for FHA endorsement.
Learn more:Mistakes to Avoid When Closing on a Mortgage
Types of FHA Construction Loans
There are two main types of FHA loans for building or renovating a home:
FHA Construction-to-Permanent Loan
This is for borrowers who are building a new home on land they own or are purchasing. It combines a construction loan with a traditional mortgage, with a single closing before construction begins. Once the home is built, the loan converts to a regular FHA mortgage and payments shift from interest-only to full principal and interest.
Learn more:What Is a Construction-to-Permanent Loan?
FHA 203(k) Loan
If you're buying an existing home that needs major repairs or upgrades, a 203(k) loan lets you finance the purchase and renovation costs.
- Standard 203(k) is for structural work or major renovations like room additions.
- Limited 203(k) is for minor repairs and updates, up to $35,000.
FHA Construction Loan Requirements
Before you can start building, you must meet some requirements to be approved for the loan.
| Credit score | 500+ |
|---|---|
| Debt-to-income ratio | Generally up to 43%; exceptions may apply |
| Minimum down payment | 3.5% for credit scores above 580 or 10% for credit scores of 500 to 579; can include equity in land you own |
| Loan limits | Based on the appraised value or the total cost to build, whichever is lower; also subject to FHA's 2025 loan limits, which range from $524,225 to $1,209,750, depending on the cost of living in your area |
| Occupancy | Must be your primary residence |
Pros and Cons of an FHA Construction Loan
As with any loan, there are benefits and trade-offs to consider.
Pros
-
Low down payment: Pay as little as 3.5% down if your credit score is 580 or higher. The value of the land can be included in your down payment.
-
Flexible credit requirements: It's easier to qualify with low credit scores, previous bankruptcy or a higher DTI.
-
Single closing: You close on both the construction loan and mortgage at the start construction, which means only one loan and thus fewer closing costs.
-
Land financing included: You purchase land and build your home with one loan instead of two.
-
Interest-only payments during construction: Since you'll likely be paying living costs elsewhere while you build your new home, this can help with budgeting until you move in.
Cons
-
Mortgage insurance required: FHA loans include both upfront and ongoing mortgage insurance premiums, which increase your upfront costs and monthly payments.
-
Loan limits: Your construction loan can't exceed your county's FHA loan limits. If your construction cost is above the loan limit, you'll have to change your build, pay more down or choose a different loan type.
-
Builder restrictions: You must use a licensed, approved contractor who's familiar with FHA property standards.
-
Higher interest rates: Because these loans are riskier for lenders, rates tend to be higher than on traditional mortgages.
-
Adjustable interest rate during construction: Your rate may fluctuate until the loan converts to a standard mortgage, making monthly payments unpredictable.
-
More paperwork: You must provide upfront documentation, inspections and approvals, which can complicate the process.
Should You Get an FHA Construction Loan?
An FHA construction loan can be a smart option if you're a first-time homebuyer, have a low credit score or have limited savings for a down payment.
However, it may not be the best fit if you want to avoid mortgage insurance, are building a high-cost home above FHA loan limits or want more flexibility with builders.
Alternatives to an FHA Construction Loan
If an FHA construction loan doesn't match your needs, here are some alternatives to consider:
- Conventional construction loan: These are often offered by banks and credit unions, have fewer guidelines and higher limits. Conventional loans are best for borrowers with higher credit scores and larger down payments. Loan options include construction-to-permanent loans and a construction-only loan that you can convert to a permanent mortgage in a separate closing.
- USDA construction loan: Available if you're planning to build in an eligible rural or suburban area. It offers no down payment and low interest rates, but has location restrictions and income limits.
- VA construction loan: Veterans, active-duty military or eligible surviving spouses may qualify with no down payment or mortgage insurance premiums. VA construction loans may have more documentation requirements and require a one-time funding fee paid to the VA.
- FHA 203(k) loan: Noted above, these can be used to purchase an existing home and finance renovations with one mortgage. Limits and complexity are similar to FHA construction loans.
- Home equity loan or HELOC: You may be able to tap into your existing home equity to finance construction on a home you already own.
Frequently Asked Questions
The Bottom Line
An FHA construction loan can be a great way to build your dream home, especially if you don't have perfect credit or a large down payment. There's more planning and paperwork involved and you'll need to have the right team in place, starting with your lender and builder.
Start by checking your free credit score to understand where you stand and what loan options may be available. Knowing your credit early helps you plan smarter.
Curious about your mortgage options?
Explore personalized solutions from multiple lenders and make informed decisions about your home financing. Leverage expert advice to see if you can save thousands of dollars.
Learn more
About the author
LaToya Irby
LaToya Irby is a personal finance writer who works with consumer media outlets to help people navigate their money and credit. She’s been published and quoted extensively in USA Today, U.S. News and World Report, myFICO, Investopedia, The Balance and more.
Read more from LaToya