How to Get an FHA Construction Loan in 2025

Can you build a house with an FHA loan?

With an FHA construction loan, you have the flexibility to buy a parcel of land, build a home from scratch, finance a permanent mortgage on the completed home, or even purchase and renovate a fixer-upper, all with a single loan.

While there are two types of FHA construction loans, both are three-in-one mortgage products that streamline the home building process by consolidating it into one loan, saving time, hassle, and expenses.

However, these loans might be challenging to find, and they often have stricter requirements compared to traditional FHA loans, making it important to understand what to expect before applying.

In this article (Skip to...)

• How does an FHA construction loan work?
• Types of FHA construction loans
• FHA construction loan requirements
• How to get an FHA construction loan
• FHA construction loan lenders
• FHA construction loan interest rates
• Pros and cons
• Alternatives
• FAQ

What is an FHA construction loan?

An FHA construction loan is a type of government-backed mortgage designed to help borrowers finance the home construction of a new home or the substantial renovation of an existing property. FHA construction loans are insured by the Federal Housing Administration (FHA), which protects mortgage lenders against defaults, making it easier for borrowers with lower credit scores and smaller down payments to qualify for financing.

FHA construction loans offer a unique solution for borrowers who want to build or significantly renovate their homes, as they provide a single loan and single closing that covers both the home construction phase and the permanent mortgage. This streamlined approach simplifies the financing process and can make it more accessible for borrowers who may not qualify for conventional construction loans.

How does an FHA construction loan work?

FHA construction loans are disbursed in stages as the construction project progresses. The lender will typically divide the loan amount into several draws, which are released to the borrower or the contractor upon completion of specific milestones in the construction process.

During the construction phase, the borrower is usually only required to make interest payments on the portion of the FHA construction loan that has been disbursed. This can help keep monthly payments lower during the construction period, which can be especially beneficial for borrowers who are also paying rent or an existing mortgage.

Once construction is complete and the home passes a final inspection, the FHA construction loan is converted into a permanent mortgage. At this point, the borrower begins making regular principal and interest payments on the loan, just like they would with a traditional mortgage.

Throughout the construction process, the FHA provides oversight to ensure that the project meets certain quality and safety standards. This oversight helps protect both the borrower and the lender and ensures that the home being constructed or renovated is a sound investment.

Types of FHA construction loans

There are two types of FHA construction loans, each designed to make homeownership more accessible, especially for first-time home buyers.

FHA construction-to-permanent loan

The FHA construction-to-permanent loan is a hybrid that combines the elements of a short-term construction loan with a traditional FHA mortgage. This versatile loan can be used to acquire land and finance construction costs. This is also known as a one-time or single-close loan; you won’t have to pay closing costs for two separate loans.

It works as a construction loan at first, but when the building is finished, it converts smoothly into a permanent mortgage. This transformation eliminates the need for a second closing, simplifying the process for the borrower. This loan type is ideal for new construction real estate projects.

FHA 203(k) rehab loan

Another type of an FHA construction loan is the FHA 203(k) loan. It is designed for the purchase and renovation of existing homes. This rehab loan type is especially beneficial for buying fixer-uppers or upgrading your current home. It allows borrowers to include the costs of minor repairs (a minimum of $5,000) or significant renovations in their total loan amount.

This program is divided into two options:

• Limited 203(k): This option is for projects under $35,000, focusing on minor repairs and upgrades.
• Standard 203(k): This option is intended for larger-scale renovations and requires a HUD-approved consultant to oversee the project, ensuring compliance with FHA guidelines​.

The 203(k) program serves as a valuable tool for transforming existing properties into dream homes, whether through purchasing a new property or renovating an existing one​.

FHA construction loan requirements

Several rules apply to FHA construction-to-permanent loans, including requirements for the borrower, the property, and the contractor. These FHA construction loan requirements ensure that all parties meet the necessary standards for a successful construction project.

Down payment:

• Minimum of 3.5% required for FHA land loans.
• A higher down payment may be necessary based on credit score and other factors.

Minimum FICO score:

• 580 is the technical minimum for FHA construction loans.
• A score of at least 640 is often needed for the FHA construction-to-permanent loan program.

Credit history:

• No bankruptcies within the last two years.
• Other negative events (e.g., foreclosures, collections) may affect eligibility.

Debt-to-Income Ratio (DTI):

• DTI must be below 43%, meaning total monthly debts should not exceed this percentage of pre-tax income.
• A lower DTI may be necessary based on credit score and other factors.

Employment and income verification:

• Two years of verified employment and income required.
• W-2 borrowers must provide the last 60 days of pay stubs, two years of W-2s, and two years of tax returns.
• Self-employed borrowers need to submit the last two years of full personal and business tax returns and all relevant tax schedules.

Mortgage Insurance Premiums (MIP):

• All FHA construction loan borrowers must pay MIP, protecting the lender against foreclosure.
• Upfront cost is 1.75% of the loan amount (can be rolled into the mortgage).
• Annual charge typically 0.55% of the loan amount, paid monthly
• Homeowners can refinance later to remove FHA MIP once they reach 20% equity in their home

How to get an FHA land loan

The FHA construction-to-permanent loan basically involves four steps, according to Money Avenue co-founder and president A. Donahue Baker.

“First, you get qualified by an approved lender. Then, your builder and general contractor get qualified for the loan. Next, your home design plans get qualified for the loan. Lastly, you close on the loan and begin the process of building your dream home.”

— A. Donahue Baker, mortgage expert.

1. Find the land to build on

When it comes to purchasing land, you have several options:

• Use vacant land you already own and fully paid off.
• Buy land with an existing loan, paying off the remaining balance at closing.
• Place land under contract with payment due at closing.

“The land should not require a teardown of the property or have multiple properties on it,” cautions Richie Duncan, senior loan officer with Nationwide Home Loans Group.

2. Get prequalified or preapproved for financing

Before you can finalize your budget and building plans, get prequalified or preapproved with an FHA-approved lender. This process determines your borrowing limits, crucial for meeting FHA construction loan requirements.

“If you don’t have the land and builder chosen yet, your prequalification or preapproval could expire and market conditions like interest rates increasing could heavily reduce the amount you can borrow,” Duncan notes.

Remember, you won’t know your borrowing capacity until you consult with an FHA construction loan-approved lender.

3. Hire a builder and finalize plans

You can begin the process without having yet picked a builder. But the builder you select must be willing to work with the FHA construction loan program. “Not every builder will,” says Mushlin.

You’ll want to pick a builder that’s worked with FHA land loans before, if possible, as this could help the process go smoothly and avoid any major issues.

4. Complete the loan process and begin construction

After your land and builder contracts are agreed to, an appraisal can be ordered to determine the property’s forecasted value based on a completed home.

“During this time, your credit will be evaluated and your land and builder contracts will be underwritten and approved. Your lender will also confirm that homeowners insurance is in place, set up your title, and calculate all final numbers for underwriting,” Duncan says.

“Once the underwriters sign off, the construction team then signs off, the documents are drawn, and you go to closing.”

After the FHA construction loan closes, home construction can begin.

Funds from the loan will be kept in an escrow account, and your contractor will be paid in installments as each construction phase is completed.

FHA construction loan property requirements

Eligible property types

The types of homes eligible to be built with an FHA construction loan include single-family homes, condominium units in approved projects or legal phases, and manufactured homes. The home must be owner-occupied as your primary residence. And, the property must be located in an FHA-approved area.

FHA loan limits

Your total loan amount can’t be higher than your county’s maximum loan limit. In 2025, most counties have a max borrowing limit of $.

Mandatory property inspections

FHA construction loans require thorough inspections to ensure the property meets all necessary standards and regulations. These inspections must be carried out by qualified professionals at various stages of the construction process.

“There is a requirement that inspections be performed by ICC-certified inspectors or a third party who is a registered architect or structural engineer,” says J. Keith Baker, chair of curriculum for Mortgage Banking and Financial Services at Dallas College.

Contractor requirements

FHA approval of contractors

The FHA must approve of your chosen licensed contractors, who are required to have needed licensure, liability insurance, and a minimum of two years of experience building homes to meet the FHA construction loan requirements.

New construction warranty

You must also receive a new construction warranty from the builder. This warranty protects you against defects in materials and workmanship for a specified period after the home is built—an important aspect to consider when meeting FHA construction loan requirements.

Any remaining funds after construction ends must be applied directly toward your loan principal — you can’t keep them as cash-back.

FHA construction loan lenders

Finding FHA construction-to-permanent loans and FHA-approved lenders offering these loans can be challenging. Additionally, “Finding a lender that will process these loans quickly, efficiently, and is staffed with a full team is even rarer,” says Mushlin with BuildBuyRefi.com.

To streamline your search, visit the US Department of Housing and Urban Development’s (HUD) website to search for FHA lenders. Although, keep in mind that not all FHA-approved lenders offer FHA construction loans.

When seeking an FHA construction loan, patience and willingness to shop around for the right mortgage lenders is essential. While the process may be more complex than obtaining a traditional construction loan, those who persevere can reap significant benefits. To increase your chances of qualifying for an FHA land loan, research lenders thoroughly, gather all necessary documentation, and be prepared to provide detailed information about your construction project.

FHA construction loan interest rates

Interest rates for FHA construction-to-permanent loans are generally higher than rates for other loan types. “Typically, borrowers often see rates around 2% to 4% higher [than current mortgage rates],” says Duncan. In comparison, the rate on a conventional construction loan might be approximately 1% higher than market rates.

Julie Aragon, Julie Aragon, CEO and founder of the Julie Aragon Lending Team, explains that mortgage lenders view FHA land loans as a greater risk because the home, which normally serves as collateral, does not yet exist. “Interest rates for FHA construction loans can also fluctuate based on the creditworthiness of the borrower and other factors,” she adds.

To secure the best interest rate on your FHA construction loan, focus on improving your credit score, reducing your debt-to-income ratio, and saving for a larger down payment. Shopping around and comparing offers from multiple lenders can also help you find the most competitive rates and terms for your specific situation.

Pros and cons of FHA construction loans

Before deciding on an FHA construction loan, it’s important to weigh the pros and cons. Here’s what you should know about the benefits and limitations of FHA construction loans.

Advantages of FHA construction loans

• Lenient credit score requirements: The FHA construction loan is accommodating for borrowers with lower credit scores, accepting a minimum credit score of 500 with a 10% down payment. For scores of 580 or higher, which is the minimum FICO score for most FHA construction loans, the down payment requirement drops to 3.5%.
• Simplified one-time close construction loan: FHA offers a one-time close construction loan, reducing the complexity and costs associated with multiple closings typical in traditional mortgage loan processes.
• Versatility in construction projects: These loans support a variety of projects, from new constructions with the FHA construction-to-permanent loan to renovations under the FHA 203(k) program. FHA land loans are also available for purchasing land for future construction projects.

“The FHA construction loan is designed to combat the more costly and cumbersome traditional construction loan program,” says Mushlin

“Otherwise, you’d have to deal with separate loans for the land buy, home construction, and mortgage, which would involve separate paperwork and closing costs. An FHA construction loan simplifies matters by combining it all in one underwriting process,” Mushlin explains.

Drawbacks of FHA construction loans

• Mandatory mortgage insurance: All FHA mortgages, including the FHA one-time close construction loan, require both upfront and annual mortgage insurance premiums for the life of the loan, until the loan is paid in full, or refinanced into another loan type.
• Borrowing limits: The FHA sets annual loan limits, which in 2025 cap at $ for most areas, with higher limits in certain high-cost regions. These FHA loan limits apply to all FHA loans, including FHA construction loans.
• Stricter requirements: Compared to other types of loans, FHA construction loans often have more stringent requirements, like specific health and safety conditions in FHA appraisals, which are not typically a concern with conventional loans.
• Requirement for licensed contractor: FHA construction loans mandate the use of a licensed contractor, which can limit flexibility in choosing builders and potentially increase project costs.

FHA construction loan alternatives

While FHA construction loans offer many benefits, they may not be the best fit for every borrower. Fortunately, there are several alternatives to consider, each with its own advantages and target audience.

Conventional construction loan

Conventional construction loans are a popular choice for borrowers with strong credit and a larger down payment. These loans typically require a credit score of 680 or higher and a down payment of at least 20%. Conventional construction loans may offer more flexibility in terms of contractor choice and project scope compared to FHA loans.

HomeStyle Renovation loan

Fannie Mae’s HomeStyle Renovation loan is a conventional loan that allows borrowers to finance both the purchase and renovation of a home with a single loan. This loan is ideal for borrowers who want to buy a fixer-upper or make significant improvements to an existing home. HomeStyle Renovation loans have similar credit and down payment requirements to conventional loans.

Freddie Mac renovation loan programs

Freddie Mac offers two renovation loan programs: the CHOICERenovation® loan and the CHOICEReno eXPressSM mortgage. The CHOICERenovation® loan is similar to Fannie Mae’s HomeStyle Renovation loan, allowing borrowers to finance both the purchase and renovation of a home. The CHOICEReno eXPressSM mortgage is designed for smaller renovation projects and offers a streamlined process for faster approval and funding.

VA construction loan

The Department of Veterans Affairs offers VA construction loans to eligible military service members, veterans, and their families. These loans offer competitive interest rates, no down payment requirement, and no private mortgage insurance. VA construction loans can be used for new construction, home improvements, and even the purchase of land.

USDA construction loan

USDA construction loans are designed for low- to moderate-income borrowers in eligible rural areas. These loans offer 100% financing, low interest rates, and flexible credit requirements. USDA construction loans can be used for new construction, home improvements, and the purchase of land in designated rural areas.

State and local programs

Many states and local governments offer their own construction loan programs, often with the goal of promoting homeownership and community development. These programs may have unique features, such as down payment assistance, tax credits, or special financing options. Researching state and local programs can help borrowers find additional resources and support for their construction projects.

FAQ: FHA construction loans

Explore your construction loan options

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