FHA loans are well known for their low-cost down payments and less-than-stringent credit requirements, making them a great option for first-time homebuyers. But you may not realize that the FHA also grants construction loans, which may allow you to either build a new property or rehabilitate an existing home that needs a little TLC.
Like traditional FHA loans, FHA construction loans are good options for buyers with less-than-perfect credit scores or who don't have much saved for a down payment. They can also be used by existing homeowners who are looking to update their properties. However, getting one of these loans can be time-intensive, and you'll have to meet a number of requirements to be eligible.
Learn more about FHA construction loans and how they work.
Types of FHA Construction Loans
There are two types of FHA construction loans: construction-to-permanent loans (often called "one-time close loans") and 203(k) rehabilitation loans.
The FHA's construction-to-permanent loan is designed for buyers who are looking to build a new property. First, the loan funds the construction of the home, and once the home is complete, it converts into a permanent loan that the buyer pays month-to-month, as with any traditional mortgage. The FHA only requires one closing for both loans.
The 203(k) rehabilitation loan is designed for buyers purchasing an existing home. The loan allows a buyer to roll up to $35,000 into their mortgage to cover repairs, improvements, or other renovations to the property. These can be good options for so-called fixer-upper homes.
Note
If you already own a single-family home, you can also use an FHA 203(k) loan to fund renovations.
Loan Requirements
As with any mortgage loan, the requirements for FHA construction loans depend on which program you'll be using. Here's how eligibility breaks down for both.
For a construction-to-permanent loan, you must:
- Have a contract with a builder who is a licensed general contractor
- Own or be purchasing the lot on which the property is being built
- Pay at least a 3.5% down payment, the FHA minimum
- Pay both an upfront and annual mortgage insurance premium
- Have a credit score of at least 500 for a limited loan, or at least 580 to be eligible for maximum financing—though some lenders set the minimum higher
- Have no delinquencies or defaults on an FHA loan in the last three years
The property must also meet HUD's minimum property standards for safety and security before closing. Your lender will verify this by ordering a property appraisal once the home has been at least 90% built.
With 203(k) loans, you must:
- Pay at least a 3.5% down payment, the FHA minimum
- Pay both an upfront and annual mortgage insurance premium
- Have a credit score of at least 500 to be eligible for a limited loan or of 580 or higher for maximum financing, depending on the lender
- Have a total loan balance, including your rehabilitation costs, that's lower than your area's maximum limit
- Be the owner and primary occupant of the property you're rehabilitating
- Be performing one of the eligible activities approved by HUD
- Have no delinquencies or defaults on an FHA loan in the last three years
- Have bids and contracts from approved contractors detailing your renovations, their costs, and the timeline of the projects
Like construction-to-permanent loans, 203(k) loans are permanent mortgage loans. The costs of the projects are rolled into your loan balance and spread across your subsequent monthly payments.
Applying for an FHA Construction Loan
If you're considering a 203(k) loan, you may want to work with a 203(k) consultant to plan and price out the work you will need for your project. Accurate pricing is vital to ensuring you secure a loan large enough to rehabilitate your home as desired. You can search for a consultant in your area at HUD.gov. You'll also need to start finding and vetting contractors you might want to use on your projects.
Note
To apply for both types of FHA construction loans, you must go through an FHA-approved lender. You'll find a full list of these at HUD.gov.
FHA Construction Loans: The Bottom Line
FHA loans aren't just for purchasing a pristine and perfect property. You can also use them toward building your dream house or for rehabilitating a fixer-upper.
Regardless of your goals, it's important to find a lender, builder, and contractor who are experienced in these unique types of FHA loans, as they require additional paperwork and documentation before approval.
Frequently Asked Questions (FAQs)
Which lenders offer FHA construction loans?
Many lenders work with the FHA to offer mortgage loans, including FHA construction loans. The Balance ranks the best FHA lenders each year based on interest rates, customer support, and ease of application process.
Who can do the work for an FHA construction loan?
Contractors who perform work for an FHA construction loan must meet certain guidelines. The FHA requirements for contractors include state licensure and at least three years of experience. In addition, contractors must not be listed on the General Services Administration's System for Award Management (SAM), HUD's Limited Denial of Participation (LDP) List, or HUD's Credit Alert Verification Reporting System (CAIVRS).
