Can You Get an FHA Loan to Build a House?

The Federal Housing Administration (FHA) offers government-backed mortgage options to make homeownership more accessible. While FHA loans are often associated with purchasing existing homes, they can also finance new home construction. This involves a specific FHA loan type, distinct from standard purchase loans, tailored to cover both the building phase and the permanent mortgage.

Understanding FHA Construction Loans

An FHA construction loan finances building a new home. The most common type is the “One-Time Close” (OTC) or “Construction-to-Permanent” loan. This structure combines construction financing and the long-term mortgage into a single loan with one closing, simplifying the process. With an OTC loan, the interest rate is locked in before construction, and no re-qualification is needed once the home is complete.

This differs from an FHA 203(k) loan, intended for rehabilitating or renovating existing properties. While a 203(k) loan finances significant repairs, it is not for building a new home. Both loan types use escrow accounts for disbursements, but the FHA One-Time Close loan streamlines new construction financing by avoiding two separate loan applications and closings.

Key Requirements for FHA Construction Loans

Securing an FHA construction loan requires meeting specific criteria for the borrower, property, and builder. These ensure the project aligns with FHA standards and minimizes risk.

Borrower Eligibility

Borrowers must meet FHA credit and income guidelines. A minimum credit score of 580 is required for a 3.5% down payment, though some lenders may require a higher score. For credit scores between 500 and 579, a higher down payment of at least 10% is necessary. The debt-to-income (DTI) ratio, comparing monthly debt obligations to gross monthly income, should not exceed 43%, though some exceptions allow up to 50%. The property must be the borrower’s primary residence, as FHA loans are not for investment properties or second homes.

Property Eligibility

The property must adhere to FHA minimum property standards, ensuring the home is safe, sound, and secure. Architectural plans must meet FHA guidelines from the outset and be approved by the lender. Site requirements also apply; the land should not be near hazards like gas or oil wells, airports, or flood-prone areas. While FHA guidelines allow financing for one- to four-unit residences, many lenders restrict FHA construction loans to single-family dwellings.

Builder Eligibility

The chosen builder must be FHA-approved and hold necessary licenses and insurance. Lenders prefer builders with a proven track record, including at least two years of experience building FHA-standard homes. The builder must provide a fixed-cost contract detailing all construction aspects and offer a one-year builder’s warranty for defects.

Required Documentation

A comprehensive set of documents is required for the FHA construction loan application. This includes personal financial statements like two recent paycheck stubs, two months of bank statements, and tax returns for the past two years. Borrowers also need to provide employment verification. Property-specific documentation includes approved architectural plans, detailed construction cost estimates, and the fixed-price contract with the FHA-approved builder.

The FHA Construction Loan Process

Once eligibility requirements are met, the FHA construction loan process begins with several procedural steps. This sequence ensures proper oversight and fund disbursement throughout home construction.

The initial step involves finding an FHA-approved lender experienced in construction-to-permanent loans. Not all lenders offer these specialized loans, so locating one with specific expertise is important. Lenders provide pre-approval, a preliminary review of the borrower’s credit history, income, and financial standing to determine the potential loan amount.

Following pre-approval, the complete application package is submitted for underwriting. This package includes all gathered documentation, such as detailed construction plans, the builder’s contract, and financial records. An FHA appraisal confirms the proposed building and materials meet FHA’s minimum property standards and establishes the property’s estimated value upon completion. If approved, the loan officially closes before construction.

During construction, loan funds are disbursed in stages, known as draws, rather than as a lump sum. These disbursements are tied to construction progress and released after inspections by the lender or FHA-approved appraisers confirm work completion according to approved plans. Borrowers make interest-only payments during construction, easing the financial burden until the home is move-in ready.

Upon construction completion, a final inspection ensures all work meets FHA standards and contract terms. For a one-time close loan, the construction loan automatically converts to the permanent mortgage, eliminating a second closing and additional costs. The lender then submits final paperwork for FHA endorsement, and the borrower begins regular mortgage payments.