FHA Construction Loan – One Time Close

fha construction loan

Understanding FHA Construction Loan Financing

The FHA Construction Loan is a one time close construction loan that allows home buyers to finance the purchase of the lot, the construction costs, and their permanent mortgage after the construction is completed. All of these aspects of your home construction project are financed with just one mortgage that is FHA insured.

The FHA construction loan is more affordable than a traditional construction loan and enables new homeowners the opportunity to build their dream home and cover all costs with just 3.5% down.

These loans are insured by the Federal Housing Administration (FHA), which provides lenders with added security.

Benefits of the FHA One Time Close Construction to Permanent Loan

There are a few benefits of the FHA construction loan (OTC) which makes it a very attractive construction loan option for home buyers who are looking to build their dream home versus buying something pre-owned. Here are some of those benefits:

  • One single closing on one loan to cover all of the costs of construction including the purchase of your lot.
  • Low FHA down payment of 3.5% which is the same as a traditional FHA loan.
  • You get the benefit of having low FHA mortgage rates.
  • You can finance the FHA construction loan mortgage payments that you will have to make during the construction timeline.
  • The loan is available with a fixed rate

Click to connect with an FHA lender to discuss your FHA construction loan scenario

George Makoutz from Novus Home Mortgage talks about the FHA Construction Loan: “The Federal Housing Administration (FHA) extends its mission beyond merely insuring loans, as it also sets standards for construction and underwriting, thereby contributing to the building of a more secure housing market.”

How the FHA One Time Close Construction Loan Works fha construction loan

There are a few steps that should be followed to successfully finance your new home with an FHA construction loan. Following this process will help to make sure that you are on the right track and to limit the chances that your project will be delayed.

  1. Speak with us to see how much you can be approved for. Your current income and credit scenario will dictate how much you can qualify for. This initial discussion is absolutely the first step in the loan application and loan approval process.
  2. You will then need to select a contractor. This contractor will also need to be approved by the lender. This is another critical step in the process because selecting the wrong contractor can lead to a lot of frustration and delays. Ask others in your area for recommendations and begin receiving contractor bids. After the contractor has been approved by your lender, then move onto the next step.
  3. If you do not already own the land, you can start shopping for the lot. Your loan officer will have provided you with an estimate on what you can spend for the land based upon your pre-approval. You may need to adjust your construction plan with the contractor to make sure you are not going over budget.
  4. Your entire build project must be approved by the lender. This means you need to have discussed a construction plan with your contractor. The contractor will submit their plans and total costs. The lender will review the plan and will at that point approve the project to continue. Your plans must also be approved by the local building department. They will also review the location on the property where the home will be built to make sure you are conforming to the appropriate lot coverage and setback requirements.
  5. Once all of the items above are completed and you have a loan approval, you can now close on your loan. This is when you will need to provide the down payment of 3.5% and possibly also include the closing costs and escrows. If you already own the lot, then the cost of that property can be considered as your down payment.
  6. Once your loan has closed, you can begin construction. Once the construction is completed, you can move right into your home.

How to Qualify for the FHA Construction Loan – One Time Close

Qualifying for the FHA One Time close construction loan is the same as it is for a standard FHA loan. Home buyers will need to meet the following eligibility requirements at a minimum.

Borrowers will need to meet the FHA credit score requirements. A minimum score of 580 is needed for a 3.5% down payment but if your score is less than 580, you will need a down payment of 10%. Read our article on the FHA credit requirements for more info.

  • The home will need to be your primary residence
  • You must have a 2 year work history with steady income
  • You will have a maximum debt to income ratio of 43% from most lenders. Some lenders do allow for up to 50%
  • You must have not had a bankruptcy within the past 2 years or a foreclosure within the past 3 years.
  • You should be prepared to pay an upfront and a monthly mortgage insurance premium.

Read our article on FHA loan requirements to get fully educated on the entire FHA loan process. The majority if what you read there will apply to your FHA one-time close construction loan too.

Please keep in mind that construction loans carry more risk for lenders and as a result, there may be more restrictive requirements.

Additional Costs that Can be Financed with Your FHA Construction Loan

These additional costs related to your entire construction or build can be financed into your loan.

  • Construction closing coordination fees
  • Construction underwriting fees
  • Loan modifications if any
  • Title changes and updates
  • Construction draws to pay your contractor during the process
  • Construction inspection fees 
  • Appraisal to make sure the project costs are in line with the final property value

The ability to roll these costs into your loan is an added benefit of the FHA one time close construction loan.

Choosing the Contractor for your FHA Construction to Permanent loan

Selecting your contractor is one of the most important steps in the process. Do not rush this decision and make sure that you spend a lot of time interviewing builders and checking out their references.

If you already have a floor plan in mind, then discuss it with the builders during the interview process. See how they interact with you and whether they offer positive suggestions and alternatives.  Make sure they are engaged in the discussion and share the same enthusiasm for the project as you do.

Ask whether they have built homes that were financed with an FHA loan before. It would be good for them to be familiar with the process and know what is to be expected when it comes to the disbursement of payments.

We recommend the contract with the builder be reviewed by an attorney that understands how construction projects work. One of the secrets in the construction business is the contractor’s ability to bill for “change orders”. 

A change order is anything you request, or that your local building department requires that is different than what was on the original set of plans. An example could be if you prefer to have a three way light switch so you can turn the light on at either side of the room. The additional cost here could be a few hundred dollars. Another example is if you decide to add crown molding or a larger deck on the rear of the home.

Make sure you have a clause in your contract for delays. Remember you are paying interest on the loan during construction. If the builder takes too long to complete the home, you are paying months of additional interest without the benefit of living in the home. Consider assessing a daily penalty for each day of delay beyond the timeline that was agreed upon in your contract.

Finally, when you are discussing anything with your contractor that involves decisions or costs, make sure you follow up with an email recapping the conversation.

Difference Between the FHA 203k loan and the FHA Construction Loan

The FHA 203k loan and the one time close construction loan are very different from one another. The FHA 203k is a renovation or rehabilitation loan for an existing home.  The FHA one time close construction loan is what you need when the home is being built for the first time.

The benefit of the FHA one time construction loan is you can likely end up with exactly what you want when the project is completed. You choose all of the features and benefits that you prefer, rather than try to modify something that may not be ideal for you.

FHA Construction Loan Rates

The rates for this program will be similar to that of a traditional FHA loan. The FHA lenders who offer this program will determine your interest rate based upon your credit score first, and then other factors such as loan size second.

If you need a rate quote, then we can help you with that and also to secure a pre-approval letter.

Planning for Your FHA One Time Close Construction Loan Project

We discussed the importance of selecting the right builder for your project. There are other steps of the planning process that you should start thinking about well before you begin.

You will need to start a complete budget on paper prior to starting the project. Then, you will need to determine which of your expenses can be rolled into the loan and which will need to be paid out of pocket.

Determine where you will live during the construction phase and for how long. Estimate what it may cost you to rent and for how many months. Be sure to include all of this into your budget.

Plan for delays in your construction project and set aside a buffer to cover your expenses should the project take much longer than expected. These delays could be related to your contractor not staying with the timeline, delays in materials, or even weather delays.

Select your personal touches before the project begins. A moment ago, we indicated that the builder could cause delays, but the homeowners also are responsible for slowing down a project. Selecting your tile, counter tops, wood flooring, carpeting, paint colors, light fixtures, appliances and bath fixtures should be done before the builder begins.

FHA Construction Loan Lenders

Not all FHA lenders offer FHA construction loans. We mentioned in other articles that although FHA guidelines have a lot of feathers and benefits and permit credit scores down to 500, the lenders have the ability to opt out of some of them.

For example, some lenders prefer not to deal with this program or the FHA 203k rehab loan because of the additional paperwork required. Some lenders have a self-imposed credit score minimum at around 600. Other lenders have loan amount minimums too.

Whatever your scenario, we have an FHA lender network that can help with your mortgage. Click to connect with an FHA lender who can work with you on your construction loan.

How to Get a Construction Loan with No Money Down

While FHA loans require a 3.5% down payment, you can close on your new home build without any out of pocket money.

Gift Funds – Gift funds from relatives or close friends are permitted with FHA loans. The gift can cover the down payment and also the closing costs. For construction, you may be gifted the land too. Read more about FHA gift fund guidelines.

Down Payment Assistance – There are various down payment assistance programs that can help with your down payment. While some lenders do also offer down payment assistance, we have not found a construction lender that offers down payment assistance.

Read more about how to get an FHA loan with no money down.

How Much Does it Cost to Build a Home?

The average cost to build a home in the United States is $300,000 or $150 per square foot and this does not include the cost of the land. This figure is just an average and the cost for your FHA construction loan project will vary based upon the following factors:

  • Size of the home – This larger the home, the more materials and time needed to complete the project.
  • Geography – Cost of labor differs for each area.
  • Materials – If you choose expensive, high end materials, then your cost will increase.
  • Timing – You may get a better deal from a builder during a slow time of the year for them.
  • Delays – Project delays can lead to additional costs.

While a new construction home could cost more than purchasing a pre-owned home, you will get exactly what you want and you should not see many home repairs for a while.

Conversely, with a pre-owned home, you could find yourself replacing expensive items such as your furnace, roof, and appliances soon after the purchase.

Frequently Asked Questions – FHA Construction Financing

Can I build a house with an FHA loan? 
You can purchase the lot and also build your house with an FHA one time close construction loan. The program pays for the lot purchase, all permits, construction costs, consulting fees, and even temporary rent so you have a place to live while the home is being built.

What if I already own the land?
If you already own the property where the home will be built, then you can use the value of that land purchase as the down payment for your FHA loan. This is a huge advantage versus many other construction loan programs that are not FHA insured.

Can I Build a Modular or Manufactured Home?
You can build a modular or manufactured home with the FHA one time close construction loan. However, if the manufactured home is a mobile home, then it must be larger than a single wide.

Can I finance the FHA closing costs?
The closing costs may also be financed which is another added benefit. This means all you will need is 3.5% of the total costs and fees to build and own your new construction home.

This loan program also permits the seller of the lot or the builder to contribute up to 6% of the closing costs. This can be pre-negotiated into the purchase price as well.

Can I build the home myself?
Home buyers cannot also be the contractor unless they are a licensed contractor by trade. The FHA will not insure a home that is not built to code and to the quality standards set within their guidelines. However, with an FHA 203k loan, you are permitted to do some of the work yourself.

Can I include the cost of installing a pool?
The FHA guidelines do not specifically call out whether the loan can be used to include a pool during your FHA construction loan project. With the FHA 203k loan, they specifically say that you cannot build a new pool, but you can use the funds to repair an old one.  If you really would like to include the installation costs of a pool, then discuss this with your lender up front.

What documents are required to apply for an FHA construction loan?
You will be required to supply the traditional documents with your loan application for a basic FHA loan approval. This includes pay stubs, bank statements, tax returns and W2’s. In addition, you will need the contract to purchase the lot if you do not own it already. If you do own the lot then you will need the deed. The contract with the builder plus any town approvals.

How long does it take to get approved for an FHA construction loan?
You can get approved for the loan amount within 24 hours. However, it may take a few weeks to approve the project and your builder.

What is the interest rate on FHA construction loans?
The interest rate on FHA construction loans are very close to the rate you would receive when buying an existing home.

Can I build a multi unit property with an FHA loan?
Multi-unit properties do fall within the property types that can be financed with an FHA loan. This also includes the construction loan.

How much can I borrow with an FHA construction loan?
The maximum amount you can borrow is the lesser between the amount you can get approved for, or the FHA loan limit for your county.

Who can help with the loan application process for an FHA construction loan?
We can help with your application process for the construction loan and your loan officer can help guide you along the way.

Where can I find guidelines on using an FHA construction loan for remodeling or renovating a property?
When remodeling or renovating a property, you will need the FHA 203k rehab loan. You can read about the requirements here.


The FHA construction loan is likely one of the best new construction loan programs that you can find. Having the ability to pay for everything with just one loan and one closing is the most important benefit.

The mortgage rates are great and they will include many costs that you would otherwise have to pay out of pocket. If you are considering building your own home and believe the total costs will be within the FHA loan limit for your county, then this may be exactly what you need.

Related Articles

How to Light a Kitchen – This article talks about how important it is to plan for the right lighting for your kitchen. This will be a huge help as you begin your planning

Things That Can Go Wrong When Building a Home – There are 7 things that can go wrong during your new home build. Read the article and be prepared.

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