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How to Build a Home with an FHA New Construction Loan

Updated February 13, 2019
5 min read

The flexibility of an FHA mortgage is often underappreciated. Many homebuyers are surprised to find that FHA loans can be used to finance a variety of property types, including new builds.

FHA new construction loans are a good option for any homebuyer who isn’t able or willing to make a large down payment on a home. For as little as 3.5% down, qualified buyers can take advantage of FHA’s competitive rates and inclusive credit score requirements to fund the construction of their new home.

Let’s take a more detailed look at FHA new construction loan requirements.

FHA Construction Requirements

If you're considering using an FHA loan for new construction, it’s important to know what to expect.

Any FHA new construction loan will require the builder to provide a set of documents including a certification for plans and specs, wood destroying insect report, and a warranty of completion of construction. Homes with a well or septic tank will require additional health and safety reports.

Beyond that, the exact FHA construction loan requirements will depend on a few factors, including the type of property and the stage of the project.

The FHA defines 3 stages of a new construction project:

  • Proposed Construction: No permanent structural elements have been placed, including pouring the foundation.
  • Under Construction: A property that has some permanent elements but hasn't been issued a certificate of occupancy.
  • Existing Less Than 1 Year: A property that has had a certificate of occupancy for up to 1 year but has never been occupied.

Single Family Housing and Condo Requirements

The FHA requires potential homebuyers to supply different documents depending on the type of residence being constructed.

For proposed construction, one of the following must be provided:

  • Copies of the building permit and certificate of occupancy
  • 3 inspections: footing, framing and final. Must be performed by an FHA roster inspector or equivalent local authority
  • A 10-year warranty and final inspection performed by an FHA roster inspector or equivalent local authority

For a property under construction, buyers must supply:

  • Copies of the building permit and certificate of occupancy
  • A 10-year warranty and final inspection performed by an FHA roster inspector or equivalent local authority

For an existing home:

  • Copies of the building permit and certificate of occupancy
  • A 10-year warranty and final inspection performed by an FHA roster inspector or equivalent local authority
  • Appraisal confirming the property is 100% complete

Manufactured Housing Requirements

The required documents change slightly with manufactured homes.

For proposed construction, buyers must supply at least one of the following:

  • An initial and final inspection by an FHA roster inspector
  • An initial and final inspection by the certifying engineer or architect
  • A 10-year warranty issued by an FHA roster inspector, certifying engineer or architect

For properties under construction, buyers must provide:

  • A 10-year warranty and final inspection performed by an FHA roster inspector, certifying engineer or architect

For an existing manufactured home:

  • A 10-year warranty and final inspection performed by an FHA roster inspector, certifying engineer or architect

LTV Limitations and Exceptions

The FHA new construction loan program cuts out some of the red tape for buyers who finance less than 90% of their home’s vale. If you plan on making a down payment of 10% or more, you might be able to skip some of the requirements we discussed here.

Ineligible Properties

Existing home that were built within the last year but have been previously occupied do not qualify for an FHA construction loan. Attached units in newly constructed mixed-use developments generally won’t be approved either.

FHA Construction to Permanent Loan

The FHA construction to permanent loan combines features of a traditional mortgage with a short-term loan to finance the construction of a home. This allows qualified borrowers to build a custom home using FHA financing.

The one time close option

With one-time-close, you can close on your construction loan and your mortgage in one go, saving time and paperwork.

How it Works

Typically, custom home financing is a two-part process. First, you apply for a loan for your supplies and labor, then you apply for a mortgage to pay off those costs. The one-time-close program rolls both steps into a single application for financing. 5

Eligibility

Borrowers who are contracted with a builder who is a licensed contractor may be eligible to use this program. Additionally, the borrower can act as their own general contractor if they are appropriately credentialed.

This program also requires the borrower to have owned the lot for less than 6 months, or to purchase the lot as a part of the closing

Pros and Cons

This program is great for FHA borrowers who want to build a custom home. That being said, custom homes can take longer and cost more than new construction that is part of an existing development. Since the FHA takes a greater risk in financing both the construction and the mortgage in this case, be prepared to meet stricter credit and qualification requirements.

Process

Getting preapproved by a lender who is familiar with the FHA one-time-close program is the first step.

FHA Construction Loan Process

If you’re interested in using an FHA loan for new construction, your first step is to find a lender who is familiar with this loan product.

Your lender can help you with a mortgage pre-approval, which will give you an idea of your budget for building a new home. It’s a good idea to get pre-approved and learn about any additional lender requirements before you sign on with a contractor.

FHA New Construction FAQs

What is a certificate of occupancy?

A certificate of occupancy is a letter from a local housing authority that verifies a new construction home is up to local code. For an FHA new construction loan, a certificate of occupancy letter is required before you can move in.

What is an early start letter?

An early start letter allows construction to begin before a plans and specs appraisal has been completed on a proposed new build. The lender can choose to issue an early start letter at the builder’s request only if the project already has a permit and a case number.

Can I build on land I already own?

Yes. The FHA allows borrowers to take out a loan to build a home on land they already own, as long as a few additional requirements are met. The exact requirements will depend on how the land value compares to your total FHA construction loan amount. If your loan-to-value ratio is very low, your construction loan may be processed as refinance.

What if the appraisal requires corrective work?

Your lender will need to review the appraisal report for your newly constructed property before closing. Sometimes, health and safety issues come up during the review process. In those cases, closing may delayed until the issues are resolved.

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