FHA Construction to Permanent Loan

An FHA construction loan is a government-backed mortgage that can help you finance building a new home or renovating an existing one.

There are two primary types of FHA construction loans: FHA Construction-to-Permanent loans for building a new home and FHA 203(k) rehab loans for renovating an existing home. 

Like other FHA loans, FHA construction loans are insured by the Federal Housing Administration. This can make them more accessible for buyers who have lower credit scores, smaller down payments or limited savings compared to some conventional construction loan options.

Because construction loans can be more complex than standard home loans, not every lender offers every type of FHA construction financing.

Please note: Neighbors Bank does not currently offer FHA 203(k) rehab loans, however, we do offer FHA Construction-to-Permanent loans for new builds.

FHA Construction Loan Requirements

To qualify for an FHA construction loan, you’ll generally need to meet the following requirements:

• Credit score: Typically 580+, though some lenders may require higher. 

• Down payment: As low as 3.5% for eligible buyers.

• Primary residence: The home must be your main residence, not a vacation or investment property.

• Debt-to-income ratio: Your lender will review your income and monthly debts.

• FHA loan limits: The loan must stay within FHA limits for the home’s county.

• Eligible property: The home must meet FHA property standards after construction or renovation.

• Licensed builder or contractor: Work generally must be completed by an FHA- and lender-approved professional.

• Mortgage insurance: FHA loans require upfront and monthly mortgage insurance.

How FHA Construction Loans Work

Securing an FHA construction loan might seem complex, but breaking it down step by step makes the process more manageable and easier to understand.

Let’s dive into how it all works so you know what to expect.

Step 1: Pre-Approval

Before you start dreaming up blueprints, you need to get pre-approved for an FHA construction loan. This involves assessing your income, employment, and credit history. They’ll make sure you have enough money to comfortably afford your mortgage payments and all of the other monthly costs.

Step 2: Find a Licensed Contractor or Consultant

When using an FHA construction loan, the work generally needs to be completed by a licensed contractor or builder who meets FHA and lender requirements. FHA may allow borrowers to act as their own builder in limited cases, but they typically need to be properly licensed.

It can help to choose a builder who has experience with FHA loans. Your builder will need to follow FHA property standards and provide the documentation your lender requires. Depending on the loan and project, a builder’s warranty may also be required.

Step 3: Loan Underwriting

Once you select your builder and finalize your plans, the lender moves into the underwriting phase. This includes appraisals to estimate the home’s future value and a thorough review of your finances.

Step 4: Construction Phase

During construction, the lender releases funds in phases based on the work completed. The best part? With an FHA one-time close construction loan, you don’t have to re-qualify for a mortgage after construction finishes.

Step 5: Move-In & Loan Repayment

Once the construction is complete, your loan converts to a normal mortgage. You then start making regular monthly payments, just like any other home loan.

How To Get an FHA Construction Loan

To get an FHA construction loan, you simply need to find an FHA-approved lender who offers them.

Finding a lender who offers FHA building loans can be challenging because of the inherent risks involved in construction, however, HUD offers a free tool that can help you find a list of lenders near you.

FHA Construction Loan Alternatives

If an FHA construction loan is not the right fit, you may have other options:

• Conventional construction loans: These may offer similar financing options but often have stricter credit, income or down payment requirements.

• USDA construction loans: These may be a good fit for eligible buyers in qualifying rural areas.

• VA construction loans: These may be available to eligible Veterans, service members and surviving spouses.

• Home equity loans or HELOCs: If you already own a home and have enough equity, these options may help fund renovations.

Construction financing can be more complex than a standard mortgage, so it’s worth comparing your options before deciding what fits your goals.

FHA Construction Loan FAQs