Many Americans aspire to construct a custom home from the ground up. It provides total control over design, placement and features that complement your lifestyle. But when it comes to funding, it gets a little trickier than buying an existing home. The question we often go asked is, Can you use an FHA loan to buy land and build a home?
The short answer is yes! But that comes with very significant ifs and buts. While regular FHA loans are designed for existing construction homes, there is a specialized version known as the FHA Construction loan to Permanent loan that allows you to purchase land and build the house all at once with one loan.
What is an FHA Construction Loan?
An FHA Construction-to-Permanent loan lets borrowers take all their costs into one loan, including the land purchase, construction costs, and final mortgage, supported by the Federal Housing Administration. That means less closing costs, less hassle, and an affordable way for first time homebuyers who might struggle to scrape together the full 20% down payment.
FHA Construction Loan Features Some of the key features of an FHA construction loan include:
- Low down payments (as little as 3.5%)
- Flexible credit requirements
- One-time close option, meaning fewer fees and paperwork
- Government backing, which makes lenders more open to approving loans
To qualify, however, the borrower and the construction project must meet specific FHA standards, and you’ll need to work with an FHA-approved builder and lender.
Using an FHA Loan to Buy Land
Yes, you can finance the purchase of land with an FHA loan but only if you will build on the property right away. The FHA won’t let you buy land as an investment. Construction must start soon after the land is purchased, and it must lead to a primary residence for the borrower.
If you already own the land you plan to build upon, with enough equity in it to cover a portion of the cost of building, the land can be rolled into the construction loan. So, the FHA new construction loan, known as the FHA construction loan, is a new construction residential loan and it is not a complete home renovation loan or two-time close product like the FHA 203k program.
What’s required to Qualify?
You have to do more than fill out an application to qualify for an FHA construction loan. Here’s what you will need to meet in any case:
- Credit Score: Minimum 580, though higher scores are preferable.
- Down Payment: As low as 3.5% of the total project cost.
- Debt-to-Income Ratio: Generally, below 43%.
- Licensed Builder: Must use an FHA-approved builder.
- Detailed Plans and Cost Estimates: Required before loan approval.
Your builder’s qualifications will be scrutinized by lenders and they will insist that the new built is completed within “contract time frame”, which is generally a year.
Choosing the Right Builder
The builder is important in the success in your FHA construction project, so you need to ensure you select wisely. Experience, licensing history, reputation, and ability to comprehend FHA procedures are the only non-negotiable.
If you are looking around and considering getting a loan for new construction, our list of Texas construction loan lenders can help you get started toward getting the loan you need when you’re ready. These are few of the builders that are familiar with FHA inspections and timelines and lessen the risk of delays or not passing.
Where to Buy Land in Texas
Everything is bigger in Texas, especially the opportunity to buy land. With dreams of living in the country with access to the Hill Country, a quiet life in East Texas, or being in close proximity to a big city like Austin or Dallas, the Lone Star state offers something for everyone.
If you’re still considering potential areas, you can read our guide on where to buy land in Texas. And it comes with advice on how to evaluate land, interpret zoning laws and check on infrastructure all critical if you’re buying land for construction purposes.
Other Loan Options to Consider
FHA construction loans are great options for many first-time home buyers or other buyers with modest incomes, but they’re not the only options.
If you are a veteran or on active duty in the military, you may receive even better benefits with a VA Construction Loan such as zero down payment and lower interest rates. With your VA construction loan, you can combine land purchase and building obligations into one septic FHA or VA loan. But these are only available to those who have VA loan entitlement.
Conventional construction loans may afford more control and higher lending limits for those with better credit and a higher down payment. Whichever you decide, be sure to partner with a lender that has experience with construction lending.
Partnering with the Best Home Builders
Building your own home isn’t only about floor plans and finishes it’s about peace of mind, personal satisfaction, quality and meeting your timeline and budget requirements. This is why it is crucial to partner with the best Texas home builders that offer knowledge about FHA construction loans as well as a history of customer satisfaction.
These builders can guide you from a home’s design to a home’s permitting, to a home’s final walkthrough, all while making sure that the home conforms to FHA’s principles and vision, as well as your own dream for the home.
Final Thoughts
So, what if you want to use an FHA loan to buy land of buildable land and construction? Yes, but only if you meet certain criteria and can start construction right away. The FHA One-Time Close Construction to Permanent program is an exciting new product offered to those seeking a new home construction loan. By packaging land purchase and construction costs into a single loan, you can find the perfect home site, get financed, and start building your dream home even if you have a less-than-stellar credit history or a low down payment.
Done well, building your own home is one of the most rewarding paths you can take. And with the right funding, builder and location, it’s totally doable.