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new home construction on land bought using fha loan

Fortunately for those looking to build a home that don’t have a lot of cash, the FHA-insured mortgage (Federal Housing Authority) facilitates the purchase of land to construct a new residence. The best part? It includes all related expenses. This loan also requires a down payment of only 3.5%!

In addition, you’ll only need to go through one closing to complete the transaction. With just one loan, you can buy the land, build your dream home, and secure permanent financing on the property.

Simply put, there is no better mortgage program to build your home. This easy program is also known as the FHA One-time Close Loan or FHA Construction-to-Permanent Loan.

FHA Land Loan Requirements

Different rules apply to this type of mortgage, including criteria for the property, borrower, and contractor. 

But for now, we will only focus on the borrower eligibility requirements:

  • A clean credit history 

There should be no bankruptcy record in the last two years.

  • Down payment 

The minimum down payment is 3.5%.

  • Income and employment verification 

W-2 borrowers have to submit their tax returns and W-2s from the last two years, and the previous 60 days of pay stubs. 

When it comes to self-employed applicants, they must submit the previous two years of complete business and personal tax returns along with tax schedules.

  • Credit score 

Even though FHA demands a minimum of 580 FICO score, the construction-to-permanent loan program requires a higher credit score. In this case, it is a minimum of 640. 

  • Debt-to-income ratio 

The monthly debts including future loan payments should not be above 43% of the monthly pre-tax income.

Moreover, the borrowers of this mortgage program are required to pay a mortgage insurance premium (MIP). It serves as a protection for the lender regarding foreclosure. 

The MIP shows an upfront cost of 1.75% of the mortgage amount. And of course, the yearly charge amounts to 0.85% of the loan amount. The latter is supposed to be paid monthly.

How to Use An FHA Loan to Buy Land?

  1. Choose the land

If there are structures on the land you’re considering or if you can't tear them down, then you should skip those options.

However, apart from these limitations, you have a wide range of options to choose from.

For instance:

  • Your own vacant land which is paid off already. 
  • A land under an existing mortgage from a private party or bank with the amount to be paid off at closing. 
  1. Become pre-qualified 

Start a pre-qualification procedure with your lender. Remember, this step is not the same as getting pre-approved.

Learn more about how to get pre-approved for an FHA loan

  1. Hire a builder

Now you're free to build your plans! Remember that your chosen builder should understand FHA mortgages, and if possible, should have previous experience working with the FHA construction-to-permanent loan. 

  1. Finish the loan procedure 

Once the builder and land contracts are finalized, order an appraisal to guarantee the home's predicted value. 

Your credit will be evaluated at this stage. Plus, the lender is responsible for settling the homeowner insurance, title, and calculating the final figures for underwriting. 

Locate FHA-Approved Lenders in Your Area

Finally, the construction team signs off, the documents are approved, and the borrower enters closing. And this is where the construction initiates. 

Learn about other types of FHA loans


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