Can You Build a House with an FHA Loan?

FHA loan programs are a popular option for home buyers. These loans are backed by the Federal Housing Administration with the intention of making home loans accessible to buyers who may not have perfect credit or who may not have the cash available for a large down payment. But what if you want to build a home? Can you build a house with an FHA loan?

Can You Build a House with an FHA Loan?

Yes, you can build a house with an FHA loan! You have two basic options for financing a new build with an FHA loan:

1. Purchase an existing newly built home from the builder with a traditional FHA loan. This option is best for buyers who prefer a shorter timeline and the simplicity of buying a pre-designed home. Not only do you avoid many of the potential pitfalls of building from the ground up, but the loan process is also much easier. At OVM Financial, we’re experts in this type of funding. We can connect you with trusted builders in your area and process your FHA loan when you’re ready to buy.

2. Use an FHA construction-to-permanent loan. With this type of loan, you can purchase the land, pay for the construction, and take out a long-term mortgage on the completed property, all at once. This option is best for buyers who want to be heavily involved in the building process, typically designing the home from the ground up. We don’t offer this type of financing at OVM, but we’d be happy to connect you with a lender that does.

What are the Requirements for Building a House with an FHA Loan?

For buying an existing new construction home with a traditional FHA loan, you generally need:

• A down payment of at least 3.5%. You will need to pay private mortgage insurance (PMI) if the downpayment is less than 20%.
• A credit score of at least 580.
• A steady source of documented income and employment history.
• To meet the FHA debt-to-income ratio limits.
• To use the home as your primary residence.

Getting an FHA construction-to-permanent loan is more complicated than getting a traditional FHA loan. There are a lot of moving parts when construction is involved, and lenders need some extra assurance that you will be able to repay the loan.

Here are the most common requirements for an FHA construction-to-permanent loan:

• Borrowers need a down payment of at least 3.5%. The borrower will need to pay private mortgage insurance (PMI) if the downpayment is less than 20%.
• Borrowers need a credit score of around 640 or higher.
• The borrower can’t have had any bankruptcies in the last two years.
• Borrowers need a debt-to-income ratio (DTI) below 43% (meaning your debt payments, including your new FHA mortgage will be less than 43% of your pre-tax income).
• The lender needs confirmation of the borrower’s income via current pay stubs or bank statements as well as tax returns for the past two years.
• The loan amount can’t exceed the FHA’s loan limits ($420,680 for 2021 in most counties, although high-value counties may be more).
• The property must be the primary residence for the borrower.
• The property must be inspected by a certified home inspector.
• The contractors must be approved by the FHA (usually requiring licensure, insurance, and at least two years’ experience).
• The builder must provide a New Construction Warranty.

What is the Process for Building with an FHA Loan?

For buying an existing new construction home with a traditional FHA loan, the process is simple, straight-forward, and comparatively quick.

1. Get pre-qualified for a home loan. This is when we check your finances and confirm that you are eligible for an FHA loan.
2. Explore new construction homes with builders in your local area.
3. Once you have an accepted offer on your newly-built home, notify us so that we can begin the process of securing your home loan.

For an FHA construction-to-permanent loan the process can vary, depending on the lender and the borrower’s exact circumstances, you generally follow these steps when building with an FHA loan:

1. Find qualified vacant land. This can be land you already own or land you need to purchase.
2. Get pre-qualified for the loan. This is when the lender will check your finances and confirm that you are eligible for the FHA construction-to-permanent loan.
3. Choose a qualified builder.
4. Get an FHA appraisal for the proposed building plans. This will confirm that the structure will comply with FHA property requirements.
5. Close on the construction portion of the loan. The construction will then be funded by the loan as work is completed. Any unused funding will go toward your loan principal (so you won’t be able to use left-over cash for other things).
6. Complete the build.
7. Convert the loan to a long-term FHA mortgage.

Where to Get Help with FHA Mortgages

At OVM Financial, we know the mortgage process can be confusing. And we understand that you probably have questions about your unique situation and need assistance navigating your home loan options. You can contact us at 757-296-2148 to get all your FHA loan questions answered. And when you’re ready to apply for a home loan, you can start your loan application online.

If you’d like to continue researching FHA loans, we suggest checking out how many FHA loans can you have and FHA streamline programs pros and cons.