How to Get an FHA Construction Loan
FHA construction loans allow qualified borrowers to finance both building a home and converting the loan to a long-term mortgage through a single closing. Borrowers with credit scores as low as 500 may qualify with a 10% down payment, while those with at least a 580 score can put down as little as 3.5%.
But FHA construction loans aren’t as simple as standard FHA mortgages. Limited lender availability, higher underwriting scrutiny, the need to use an approved consultant and permit timing issues make these loans more complex than most homebuyers expect. Before applying, it’s important to understand how the process works and whether a loan backed by the Federal Housing Administration (FHA) is right for you.
- An FHA construction loan lets you finance both building a home and the permanent mortgage in one closing.
- You can also use an FHA construction loan to finance a build only if you already own land, or to fund renovations if you already own a fixer-upper.
- These mortgages are more complex than standard FHA loans, requiring contractor approval, staged inspections and careful timing around permits and rate locks.
What is an FHA construction loan and how does it work?
An FHA construction loan is a mortgage that allows you to finance building a home or renovating an existing property. There are two types of FHA construction loans:
- Construction-to-permanent loan: A single-close option that’s best for buyers who want to build a brand-new home and simplify financing by avoiding two separate loan closings.
- FHA 203(k) loan: Best for buyers who’ve found an existing home that needs significant repairs or renovations and want to roll the purchase and rehab costs into a single mortgage.
How does an FHA construction-to-permanent loan work?
The FHA construction-to-permanent loan, also called an FHA one-time close construction loan, covers new construction.
Use the loan to: Buy land, finance construction costs and cover lender fees.
How it works: This loan combines the features of a short-term construction loan with a standard, long-term FHA loan. You’ll close once and, as with all construction loans, receive payouts in stages known as “draws” (typically four to six draws tied to construction milestones). When construction is complete, the loan automatically converts to a permanent FHA mortgage with regular monthly payments.
How does an FHA 203(k) rehabilitation loan work?
If you’ve found a fixer-upper home to buy, or your current home needs upgrades, an FHA 203(k) loan can help you finance your remodeling costs.
Use the loan to: Make minor repairs (up to $75,000 using the limited program) or major renovations to an existing home.
How it works:
- Standard 203(k) loans: This program allows you to tackle renovations on a home you’re buying or refinancing. The program requires a consultant to supervise your project from start to finish. You can find a consultant in your area by checking the U.S. Department of Housing and Urban Development (HUD)’s approved FHA 203(k) consultant list.
- Limited 203(k) loans: You can make improvements that don’t rise to the level of major renovations — up to a $75,000 maximum. For example, you can replace a leaky roof, install new carpet or upgrade your kitchen cabinets. You may use an FHA consultant, but aren’t required to do so.
How long does an FHA construction loan take?
Once you apply, it’s typical for an FHA construction loan to take 30 to 65 days to close, and the construction should be planned to take no more than nine to 12 months.
However, if you need more time, your lender is allowed to offer extensions.
If you don’t start the work within 30 days, stop for more than 30 days or fail to complete the work by the timeframe your lender has agreed to, you’re at risk of mortgage default.
In some markets, permit approvals can take a significant amount of time — think three to six months in Los Angeles, more than six months in Portland, Ore., or more than seven months in Denver.
Long approval timelines can create additional complications. For example, if a permit takes longer than the lender’s mortgage rate lock period, the original loan terms may no longer be available.
Because of this, some lenders won’t move forward with an FHA construction loan unless the building permit has already been approved.
Using land you already own
Owning land before applying for an FHA construction loan can be a good thing, as it potentially reduces the amount of cash you’ll need to bring to your closing. But the land must be properly appraised, free of title issues and remain within FHA loan limits to qualify under HUD guidelines.
Can land equity count as your down payment?
Yes. Under FHA guidelines, land you already own can be treated as equity and applied toward your minimum required investment, which is the FHA’s term for your down payment. If the land is owned free and clear, its appraised value can be credited toward the required 3.5% (or 10%, if applicable) minimum investment.
How is the land value determined?
FHA requires a home appraisal after the repairs are complete, so the land value will be factored into the property’s overall appraised value in its completed state.
Does it matter how long you’ve owned the land?
The FHA doesn’t impose a specific requirement for how long you must own the land before applying for a construction-to-permanent loan. That said, land acquired within the last 12 months may meet extra scrutiny, and individual lenders may have their own standards that govern how they deal with recently purchased property.
Additionally, the title must be clear and any existing liens must be addressed prior to final approval.
What if I have a land loan?
If there is an outstanding loan on the land, typically it will be paid off at closing using the proceeds of the FHA construction loan. The total loan amount — including land payoff and construction costs — must remain within local FHA loan limits.
How to get an FHA construction loan
1. Get preapproved for an FHA loan
You’ll need to meet with a lender and have them perform a preliminary review of your credit history, income and assets. Once that’s complete, you’ll receive a conditional preapproval letter detailing how much money the lender may be willing to lend you once they’ve had a chance to verify your information.
Still choosing a lender? See our picks for the best FHA loan lenders today.
2. Choose your land (or home)
Once you’re approved for a loan, you can use the proceeds to buy land (or an existing home, in the case of a 203(k) loan). Most plots are acceptable; however, FHA construction loan rules don’t allow you to build a home on land if it’s near a gas or oil well, for example.
3. Choose a licensed contractor or builder
FHA construction loan guidelines require you to work with a licensed contractor or builder. The contractor may have to provide documentation to confirm they have the proper licensing and insurance. You’ll also need to hire a 203(k) consultant if you’re getting a standard 203(k) loan.
4. Get a home appraisal
Your lender will order an FHA appraisal to confirm that the building and materials meet FHA’s minimum property standards.
5. Close on the construction loan
If the appraised value is enough to cover your costs, you’re ready to close. If not, you may need to make up the difference or scale back your renovation plans.
Finding a lender that offers FHA construction loans can be more challenging than securing a standard home loan. Some lenders LendingTree has reviewed who provide FHA construction loans include Fairway Independent and Wintrust Mortgage.
FHA construction loan requirements
Before you can start the construction process, you must meet these key eligibility requirements:
- Credit score: You’ll need a minimum 500 credit score to qualify.
- Down payment: You’ll only need a 3.5% down payment if you have at least a 580 credit score. However, you’re required to put down 10% if your credit score is between 500 and 579.
- Debt-to-income ratio: Your debt-to-income (DTI) ratio measures your gross income against your existing debts. It tells the lender if you can comfortably afford to repay the loan. You’ll need a maximum 43% DTI ratio or, in rare cases, 50%.
- Loan amount: You’ll need a loan amount that doesn’t exceed local FHA loan limits.
- Occupancy: FHA construction loans are available for primary residences only. If you want to build a second home or investment property, you’ll need to consider other loan types.
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Property type: You can use an FHA construction loan with these housing types:
- Single-family home (including eligible accessory dwelling units)
- Multifamily homes with two to four units
- Townhomes
- FHA-approved condominiums
- Manufactured homes
- HUD homes (also known as Real-Estate Owned or REO) properties
- Mixed-use properties that are at least 51% residential
Can you qualify for a loan with your credit score? Get your score for free with LendingTree Spring.
FHA construction loan costs breakdown
Realistically, the down payment you’ll need to bring to closing is just the tip of the iceberg. Additional costs you need to consider when assessing whether you can truly afford an FHA construction loan include:
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What you need to close:
- Closing costs: Typically 2% to 6% of the loan amount
- Upfront FHA mortgage insurance (UFMIP): 1.75% of the loan amount
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Mortgage reserves or contingency funds: 5% to 10% of the build cost (varies by lender)
While not required by the FHA, many lenders require you to show additional liquid funds that can be used to cover construction cost overruns and contingency expenses. The exact amount varies by lender.
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Costs during construction:
- Inspection fees for each draw stage ($375 per inspection)
- Interest paid during the construction phase (the amount depends on your contract interest rate)
- Change order fees ($120 per order)
- Permit fees (these vary widely based on the project’s location, size and the value of the labor and materials)
- Reinspection fees ($225 per work item)
If you’re building a $400,000 home, the total cash needed could range from $49,000 to $65,000.
- Down payment: $14,000
- UFMIP: $7,000
- Closing costs: $8,000 to $24,000
- Reserves/contingency: $20,000
And, don’t forget, there will be ongoing costs and fees like homeowners insurance, annual FHA mortgage insurance and HOA fees (if applicable).
Pros and cons of FHA construction loans
Pros
- Provides flexible qualifying requirements: FHA accepts credit scores as low as 500, provided you’re able to make a 10% down payment. However, if your score is at least 580, you’ll only be required to put down 3.5%.
- Offers the ability to do one closing: In more traditional financing scenarios, you’d have to take out two separate loans — a construction loan and a permanent mortgage. This means attending two closings and paying two sets of closing costs. With the FHA construction loan, you’ll only have to go through the process once.
- Gives options for multiple types of construction projects: Between the FHA construction-to-permanent loan for new builds and the FHA 203(k) program for fixer-upper homes, an FHA construction loan has you covered, no matter what type of construction project you have in mind.
Cons
- Shrinks lender options: It can be more difficult to find lenders offering FHA construction loans, which potentially means less competition and increased costs.
- Requires mortgage insurance: FHA borrowers must pay two types of FHA mortgage insurance: an upfront fee worth 1.75% of the loan amount and an annual premium that costs between 0.15% and 0.75% of the loan amount. Unlike private mortgage insurance, this requirement can’t be waived once you build up more home equity.
- Sets specific limits on your loan amount: The FHA sets annual limits on how much you’re able to borrow. For 2026, the limit for most areas is $541,287. However, it extends to $1,249,125 in select areas with a higher cost of living.
- Imposes more requirements than other loan types: FHA construction loans come with more red tape than some other loan options. For example, the FHA appraisal sets specific health and safety requirements that aren’t typically found with conventional loans.
Alternatives to an FHA construction loan
Conventional construction loan
Your local bank or homebuilder may offer their own construction loans. When the home is finished, you’ll need to pay off the construction financing with a permanent loan. This is also called a two-time close construction loan, since you’ll close twice and pay closing costs on both loans.
See current conventional mortgage rates.
State and local programs
Local nonprofit organizations and government agencies, like your state or city housing authority, could have programs available to assist lower-income borrowers. You may qualify to receive down payment assistance for use with a new construction or home renovation mortgage.
VA construction loan
Eligible military borrowers can build a home with up to 100% financing by using a construction loan guaranteed by the U.S. Department of Veterans Affairs (VA). VA construction loans are available with a one-time or two-time closing option.
See current VA mortgage rates.
USDA construction loan
Low- to moderate-income borrowers may be able to build a home in rural areas designated by the U.S. Department of Agriculture (USDA) with this program. The program also offers 100% financing to eligible borrowers.
Fannie Mae HomeStyle® renovation loan
This conventional renovation loan works like the FHA 203(k) program, except that it allows for down payments as low as 3% with a minimum 620 credit score. An added bonus of the HomeStyle loan: You can roll some of your monthly mortgage payments into the loan amount if you can’t live in the home while it’s undergoing repairs. You also have the option to do some of the repairs yourself.
Freddie Mac’s renovation loans
If you have a renovation planned, Freddie Mac has two loan options for you. The CHOICERenovation® loan is meant for large-scale renovations, financing up to 95% of the home’s value for a single-family home (including manufactured homes). Meanwhile, the CHOICEReno eXPress® mortgage is for smaller-scale projects and finances up to 15% of the home’s value. Other qualifications will vary, depending on the mortgage you currently have and how many units your home has.
Home equity loan
If you want to do renovations on a property you already own, you may be able to tap your home equity to do so, using a home equity line of credit (HELOC) or home equity loan.
Cash-out refinance
A cash-out refinance replaces your existing mortgage with a larger loan so you can pocket the difference to use for various expenses, including home improvements. Refinancing might be worth considering if rates have dropped and you plan to do major renovations.
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