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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
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If you’re familiar with FHA loans, you know that they can provide a path to homeownership for buyers who otherwise may not be able to qualify for a mortgage. What you might not know is that these loans can also help you build a new home or renovate one you plan to buy.
An FHA construction loan combines the advantages of a traditional FHA loan — namely, more relaxed lending requirements than a conventional mortgage — with the benefits of a short-term construction loan, which can be harder to qualify for and tends to require a higher credit score, a lower debt-to-income ratio and a larger down payment than even a conventional loan.
FHA construction loans allow you to roll the costs of building or renovating a home into an FHA mortgage loan. The construction loan, backed by the Federal Housing Administration, covers expenses including the purchase of land, building materials, construction work and permitting fees.
Just like a traditional FHA loan, these loans make it possible to build a home with a down payment as low as 3.5 percent or a credit score as low as 500.
For either type of FHA construction loan, you’ll first need to apply through an FHA-approved lender. You can find a list of qualified lenders through the U.S. Department of Housing and Urban Development (HUD). After the lender determines what you qualify for, you’ll choose a contractor for the project. Your lender will need to approve all of your contractor’s plans before you can close on the loan. After closing, you can begin the construction or renovations.
Note that with any FHA loan, including a construction loan, you must pay mortgage insurance premiums. These include a one-time upfront premium, which is 1.75 percent of the amount of the loan, plus an annual premium that varies and can be paid in monthly installments.
With an FHA construction-to-permanent loan, you obtain both the construction loan and permanent mortgage at the same time. In turn, you only need to close on the loan once. It starts out as a short-term construction loan, and once the construction phase is complete, it kicks over to a mortgage to finance your home.
Before you can proceed with a construction-to-permanent loan, your lender will need to sign off on the contractor you choose. Once the contractor is approved, you’ll be put on a draw schedule for the loan based on the different phases of the project. During construction, you might only be required to make interest payments. Once construction is complete, the lender converts your construction loan to a permanent mortgage, usually with a 15- or 30-year term. Then, you make payments on your mortgage just like a regular home loan.
The standard 203(k) loan is reserved for projects that cost a minimum of $5,000. It requires you to work with a consultant — you can locate one via HUD’s 203(k) consultant database.
In contrast, there’s no minimum on a limited 203(k) loan, and it’s designed for smaller renovations. It can’t be used for major repairs, including ones that take more than six months to finish or require you to vacate the home for more than 15 days, or require you to pay the contractor more than two payments.
FHA construction loans have the same standards as FHA purchase loans, but with a few additional requirements. To qualify for any FHA loan, you must:
If you’re looking for an FHA construction loan, you must also provide documentation showing you’ll be working with a licensed contractor. For a standard 203(k) loan, you’ll also need to work with an approved 203(k) consultant. In addition, for any kind of construction loan and project, you must be prepared to submit the plans to your lender for review.
There are other types of construction loans— either federally-backed or sponsored by a state or local government — that offer relaxed lending requirements to specific groups that qualify. There are also private construction loans that may offer better terms if you meet the qualifications.
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