Can You Build a House With an FHA Loan?

The Federal Housing Administration (FHA) offers government-insured loans designed to make homeownership more accessible, particularly for individuals who might face challenges qualifying for conventional mortgages. While FHA loans are commonly used for purchasing existing homes, specific FHA programs also finance new home construction. These programs combine financing for both the construction phase and the subsequent permanent mortgage.

Types of FHA Construction Loans

The primary FHA loan for new home construction is the “Construction-to-Permanent” or “One-Time Close” loan. This loan streamlines financing by combining the construction loan and permanent mortgage into a single loan with one closing. Borrowers avoid two separate loan applications and two sets of closing costs.

With a one-time close FHA loan, the interest rate is locked in before construction begins, providing financial certainty. Funds are disbursed in stages, or “draws,” as construction progresses, ensuring the builder is paid for completed work. Once the home is built and passes final inspections, the loan seamlessly converts into a permanent FHA-insured mortgage, eliminating the need for re-qualification.

Borrower and Project Requirements

To qualify for an FHA construction loan, borrowers must meet specific eligibility criteria. A minimum credit score of 580 generally allows for a 3.5% down payment, though a score between 500 and 579 may require a 10% down payment. Lenders may impose their own higher minimum credit score requirements, often around 620.

Borrowers’ debt-to-income (DTI) ratios are also evaluated. FHA guidelines typically suggest a DTI of no more than 43%, though some lenders may allow higher ratios, up to 50% or 56.9%, with compensating factors. The FHA requires the home to be the borrower’s primary residence.

The construction project must adhere to specific FHA requirements. The builder must be FHA-approved, licensed, and insured. Detailed building plans and specifications must be submitted for approval. The land, if not already owned, can be purchased as part of the loan. Professional inspections are mandatory throughout construction to verify compliance with FHA Minimum Property Standards and local building codes.

The Construction Loan Process

Navigating the FHA construction loan process begins with identifying an FHA-approved lender specializing in these loans. Resources like the U.S. Department of Housing and Urban Development (HUD) website can assist in finding approved lenders. Once a suitable lender is found, the borrower undergoes a pre-approval process.

After pre-approval, the application package is compiled, including detailed construction plans, cost estimates, and the contract with the FHA-approved builder. The loan then proceeds to underwriting, where the lender reviews documentation to ensure compliance with FHA guidelines and the borrower’s ability to repay. Upon approval, the loan is closed, and funds are placed into an escrow account.

During construction, funds are released to the builder through “draws,” which are incremental payments tied to the completion of specific milestones. Each draw requires an inspection to confirm work completion according to approved plans and FHA standards. Interest payments on the disbursed funds are usually made by the borrower during this period. Once construction is finished and a final inspection is passed, the construction loan automatically converts into the permanent FHA mortgage.