How an FHA Construction Loan Works


BY The Lenders Network

FHA construction loan

2 minute read

If you’re looking into construction loans then you’re either building a new home from the ground up, or buying a fixer-upper home and renovating it.

FHA home loans are great because of their low credit and down payment requirements.

You may be wondering how you can get an FHA construction loan to pay for the project.

Whether you’re building, or renovating a house you can get financing.

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What is an FHA Construction Loan

The Federal Housing Administration which is a division of the US Department of Housing and Urban Development, or HUD created the FHA home loan program to make getting a mortgage easier for consumers.

While very rare, FHA construction loans do exist, it’s just that most lenders hate to do them. These are also called construction to permanent loans.

With an FHA construction loan you will close on the mortgage before breaking ground. The funds go into an escrow account and disbursements will come in various stages after being inspected.

Before the remaining funds are disbursed there is a final inspection to ensure the home meets all of the FHA housing standards.

The credit requirements for a construction loan is much higher than a traditional FHA loan because of the complexity and the risk it involves. Typically lenders will require you to have a 680 or higher credit score.

How to Get an FHA Construction Loan

Finding a lender that offers this type of mortgage loan is quite difficult. You will probably have to get online and search for a lender that specifically does FHA construction loans.

These loans are very time consuming and take a long time to complete, because of this most lenders do not offer construction loans.

FHA 203(K) Loans

FHA 203k rehab loans are much easier to locate lenders for. A 203k loan is a type of FHA loan that lends money for the purchase of a home and additional cash to make improvements or repairs to the property in one loan.

There are two types of FHA 203k loans, streamline and standard. A streamline 203k is a quicker process that is reserved for homes that need mostly cosmetic repairs such as, flooring. A standard 203k is for properties that more extensive repairs such as plumbing and foundation repairs.

203k Loan Benefits

  • 3.5 percent downpayment
  • Minimum 640 credit scores
  • Cash to make cosmetic repairs
  • Up to $35,000 for renovations or repairs
  • May pay for up to 6 months of mortgage payments
  • Fixed-rate and adjustable-rate mortgage loans available

FHA 203k loan infographic

Cost of Building a House

The cost of building a house will depend on the type of materials used and the square footage. To get a complete breakdown and figure out the cost to build a house with our infographic.