FHA construction loans
Senior Content Writer
Quick insights
- An FHA construction loan helps homebuyers or homeowners finance the cost of building a new home or renovating an existing property.
- FHA-backed construction and renovation loans may offer more flexible borrower qualification requirements than some conventional options
- Borrowers, properties, builders or contractors and proposed work must meet applicable FHA and lender requirements.
Building a home from the ground up can feel like a huge leap, and so can a major renovation. Federal Housing Administration (FHA) construction loans might make the financial side more accessible, particularly for first-time homebuyers.
For a new build, an FHA construction-to-permanent loan may combine eligible land, construction and permanent-mortgage costs in one financing arrangement. For an existing property that needs repairs, an FHA 203(k) loan may combine the home purchase or refinance with eligible renovation costs.
What is an FHA construction loan?
An FHA construction loan is a government-backed mortgage that lets you finance the construction of a new home or major renovations to an existing one. FHA-backed financing may be used for either new construction or eligible renovations. A construction-to-permanent loan combines the construction phase and permanent FHA mortgage, while an FHA 203(k) loan combines the purchase or refinance of an existing property with eligible rehabilitation costs.
FHA construction loans can make building more accessible because they offer flexible qualification rules compared to some conventional construction loans. These generally include a lower down payment and a lower minimum credit score.
How does an FHA construction-to-permanent loan work?
An FHA construction-to-permanent loan combines eligible construction financing with the long-term FHA mortgage through one closing. FHA 203(k) rehabilitation financing follows a different process for eligible repairs to an existing property. Instead of applying for separate construction financing and a permanent mortgage, you complete a single close process that streamlines funding. The process typically includes:
- Single close process: You close on the loan once before construction begins. The loan automatically converts into a traditional FHA mortgage after construction is complete.
- Flexible down payment requirements: FHA guidelines may permit a minimum required investment as low as 3.5% for eligible borrowers. Credit score, down payment and construction loan requirements vary by lender, and lenders may apply requirements beyond FHA minimums.
- Income and credit qualification: You must meet the FHA’s income requirements, provide documentation showing you can afford the monthly payments and meet lender guidelines.
- Approved builder requirements: Your contractor or builder must meet FHA and lender requirements, including proper licensing and qualification to complete the project.
- Draw process: During construction, loan funds are released in stages called “draws” as the builder completes specific milestones. Home inspections are usually required before each draw is approved.
Chase does not offer FHA construction-to-permanent loans.
Types of FHA construction loans
The FHA offers different loan options depending on whether you want to build a new home or renovate an existing property.
FHA construction-to-permanent loan (one-time-close loan)
An FHA construction-to-permanent loan, also called a one-time-close loan, combines financing for building a new home with the permanent FHA mortgage into a single loan. This simplifies the process by avoiding a second closing after construction is finished.
FHA 203k rehab loan
An FHA 203(k) rehab loan lets you purchase or refinance a home and include renovation costs in the mortgage. This option is useful if you are buying a fixer-upper and want to finance repairs and improvements.
There are two types:
- Limited 203(k) loan: Designed for eligible repairs and improvements that do not involve major structural work. Under current FHA guidance, the maximum rehabilitation amount is $75,000. Lenders may apply additional requirements.
- Standard 203(k) loan: Designed for larger renovation projects—including structural repairs, room additions and major improvements—that require more extensive work. There is no maximum cap on the repair cost, but the total combined cost of the home purchase and renovations must fall within your local FHA mortgage limit.
Chase does not offer FHA 203(k) rehabilitation loans.
FHA construction loan requirements
Before you can close on an FHA construction loan, the FHA and mortgage lender review several factors.
General property requirements:
- The home must be used as the borrower’s primary residence.
- The property must meet FHA minimum property standards for safety, security and structural condition.
- New construction must follow approved building plans and FHA guidelines.
- The builder must meet lender and FHA approval requirements.
- Renovation projects must meet FHA guidelines for eligible improvements and required inspections.
Common lending requirements:
- 3.5% or higher down payment, depending on the borrower.
- Financial details like payment history, debt-to-income ratio, income and employment.
- Mortgage insurance premiums (upfront and annual).
Credit requirements vary by lender. FHA guidelines may allow lower credit scores for some FHA-insured mortgages, but lenders offering construction or rehabilitation financing may require higher scores and additional qualifications.
Alternatives to an FHA construction loan
An FHA construction loan is not the only way to finance building or renovating a home. Other options include:
- Conventional construction loan: If you have stronger credit and a larger down payment, a conventional construction loan may give you more flexibility. Requirements vary by lender.
- Renovation loans: Programs like the Fannie Mae HomeStyle Renovation loan let you finance repairs and upgrades as part of a conventional mortgage.
- VA construction loan: Eligible veterans, servicemembers and certain members of the National Guard or Reserve may be able to use VA-backed construction financing. A down payment may not be required for an eligible transaction, but lender availability, entitlement, credit, property and program requirements apply. Chase does not offer VA construction-to-permanent loans.
- Home equity options: If you already own a home with equity, a home equity loan or home equity line of credit may be options for financing renovations.
- Cash-out refinance: A cash-out refinance also leverages your home equity and would replace your current mortgage with a new, larger loan. You receive the difference as cash.
What is an FHA land loan?
An FHA land loan isn’t actually a standalone product. The FHA doesn’t offer loans for buying raw land. An FHA mortgage loan can be used to buy a home that sits on land, including larger lots, as long as the land’s value is proportionate to the home and the property is used as your primary residence. In short, the FHA may finance land plus a home, either existing or one to be built.
In summary
An FHA construction loan can help first-time homebuyers finance the cost of building a new home or renovating an existing property. Key benefits can be the FHA loan qualification requirements and a streamlined loan process. Understanding the requirements, loan options and alternatives can help you decide whether FHA construction financing fits your goals.
