Can You Use an FHA Loan to Buy Land?

Federal Housing Administration (FHA) loans are government-insured mortgages designed to expand access to homeownership for individuals who might not qualify for conventional loans. Offered by private lenders and backed by the FHA, these loans reduce risk for lenders and enable more flexible eligibility criteria. Their primary purpose is to facilitate the purchase, construction, or renovation of a primary residence.

Understanding FHA Loan Eligibility

To qualify for a standard FHA loan, borrowers must meet specific criteria ensuring the property will serve as a primary residence. Eligible properties include single-family homes, multifamily properties with up to four units, condominiums, and some manufactured homes. The property must also pass an FHA appraisal, verifying it meets minimum standards for safety, security, and structural soundness.

Borrower financial requirements include a minimum credit score of 580 for a 3.5% down payment, or 500 with a 10% down payment. Debt-to-income (DTI) ratios are also considered, with no more than 31% of income allocated to housing costs and 43% to total debt payments. Lenders may offer flexibility on DTI if compensating factors, such as significant cash reserves or a strong credit history, are present. All FHA loans require borrowers to pay a Mortgage Insurance Premium (MIP), consisting of an upfront premium of 1.75% of the loan amount and an annual premium paid monthly, around 0.55% of the loan amount.

FHA Loans for New Home Construction

While FHA loans cannot be used to purchase raw land alone, they can finance land acquisition as part of a new home construction project. This is facilitated through an FHA construction-to-permanent loan, also known as a one-time close loan. This single loan covers both the land purchase and the construction of a new primary residence on that land.

For this type of FHA loan, specific requirements apply beyond standard eligibility. Borrowers must work with an FHA-approved builder who provides a fixed-price contract detailing all construction costs. Detailed construction plans and a timeline are necessary to ensure the project aligns with FHA guidelines. Multiple inspections are conducted throughout construction to verify adherence to FHA safety and quality standards before the loan converts to a permanent mortgage. If the borrower already owns the land, its equity can sometimes cover part or all of the required 3.5% down payment.

FHA 203(k) Rehabilitation Loans

The FHA 203(k) Rehabilitation Loan program offers another pathway for using FHA financing for properties that include land, specifically for those requiring significant repairs or improvements. This loan allows borrowers to finance both the purchase or refinance of a property and the cost of approved renovations into a single mortgage. The program is designed for properties that will serve as the borrower’s primary residence and need work to meet FHA minimum property standards.

There are two main types of 203(k) loans: the Limited (or Streamline) 203(k) and the Standard 203(k). The Limited 203(k) is for non-structural repairs and improvements, with a maximum renovation cost up to $35,000. This type is suitable for minor cosmetic fixes or essential upgrades. The Standard 203(k) is for more extensive projects, including structural work, and requires a minimum repair cost of $5,000. For Standard 203(k) loans, a U.S. Department of Housing and Urban Development (HUD) consultant must oversee the renovation process to ensure compliance and proper execution.

Financing Raw Land Purchases

For individuals interested in acquiring raw land without immediate plans for FHA-eligible construction or rehabilitation, alternative financing options exist outside of FHA programs. These alternatives come with different terms and requirements. Conventional land loans are a common option, though they require higher down payments, ranging from 15% to 50% of the land’s value, depending on its development status. Lenders also charge higher interest rates for land loans due to the increased risk compared to financing a developed property.

The repayment terms for conventional land loans are shorter than traditional mortgages, ranging from 2 to 10 years, with some potentially involving balloon payments. Other financing avenues include seller financing, where the landowner directly provides a loan to the buyer, allowing for negotiable terms. Personal loans may also be an option for smaller land purchases, though they carry higher interest rates and shorter repayment periods than dedicated land loans. Paying with cash remains the simplest and most cost-effective method for purchasing raw land, avoiding interest charges and loan-related fees entirely.