How to Build a New Home with an FHA New Construction Loan
6 minute read
July 18, 2022


Home building is an exciting journey filled with many decisions throughout the entire process.

Whether you’re still deciding on building or have the blueprints for your home in hand, the first step is figuring out which kind of loan you’ll need.

If you’re looking to renovate or build, then an FHA new construction loan might be the loan for you.

We’re going to review what an FHA new construction loan is, how they’re used, what the benefits are, and most importantly—how to take the next step and start your building journey.

What is an FHA new construction loan?

An FHA loan is a loan that is backed by the Federal Housing Administration in an effort to make building, or renovating, your home more affordable.

These types of loans can cover the cost of purchasing land, construction, and building and permitting fees.

There are two types of FHA new construction loans 

  1. FHA one-time close loans
  2. FHA 203(k) loan

An FHA one-time close loan covers the purchase of land and construction costs into one loan. Once construction is complete, the loan converts to a permanent mortgage loan.

FHA 203(k) loans enable homeowners to purchase and/or renovate an already existing home.

This type of loan can further be broken into two separate loans:

  1. Limited 203(k) mortgage loan
  2. Standard 203(k0) mortgage loan

A limited 203(k) mortgage loan allows borrowers to improve their home after moving in, or for making improvements before selling their home. The typical loan range is between $5-35,000 for improvements or repairs.

A standard 203(k) mortgage loan is more targeted for fixer-uppers as they combine the cost of purchase of the home and improvements/repairs. 

The loan can be used for structural alterations, additions, upgrades for health and safety, detrimental landscaping, and much more.

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How do FHA construction loans work?

One-time close loans work so that you’ll only close on the loan once, which keeps financing simple and convenient—and cuts down on closing costs.

The lender will need to approve your contractor. After your lender has approved, you’ll be provided a construction timeline for the loan. 

Once construction is complete, the loan would convert into your permanent mortgage, typically a 15 or 20-year loan. 

This is when you would begin to make your monthly mortgage payments. 

Standard FHA 203(k) loans differ as they require a loan minimum of $5,000 and they require you to work with a consultant on your project. This consultant will also have to be approved by your lender. 

Limited FHA 203(k) loans don’t have a minimum loan requirement and are typically used for smaller projects, valued at less than $5,000. 

However, these kinds of loans can’t be used for projects that will exceed six months. With either type, the first step is applying through an FHA-approved lender.

Once you decide on a loan, the process looks like this:

  1. The lender determines how much you qualify for
  2. You select a contractor
  3. Your lender approves of the contractor and construction plans
  4. Close on the loan 
  5. Construction begins
  6. Monthly payments begin
  7. Construction completes
  8. Final closing
  9. Permanent mortgage monthly payments begin

It’s imperative to ask your potential lender what is required at each step. and about their turn-around time in between each phase so you know what to expect and when fees will be due during the process.

Pros and cons of an FHA new construction loan

There are pros and cons to every loan type. Let’s look at the pros and cons of the FHA construction loan, to determine if it’s right for you.  


  • Low down payments 
  • Low closing costs 
  • Accessible to low-credit buyers 
  • Low interest rates & fixed interest rates during the construction process
  • Ability to buy and build (or renovate) with one loan
  • Ability to complete small and large projects on your home 


  • Borrowing limits: Depending on which loan you are applying for, the borrowing limits differ and can be restricting. 
  • Required FHA mortgage insurance: All FHA loans require that the borrower pays for mortgage insurance and includes a one-time upfront premium.
  • It can be difficult to find providers.

Speak with a home loan advisor so they can explain the unique elements of each construction loan and how they can be beneficial to what you’re looking for.

FHA Construction requirements

Most FHA construction loans have the same standards as FHA purchasing loans but are possible with a few additional requirements.

While there are standard requirements you can expect, ask your potential lender exactly what they require to be approved for an FHA construction loan. 

In most cases you must be able to meet and provide:

  • 3.5% down-payment
  • A minimum Loan to Value ratio of 96.5%
  • Low credit score, between 500-460
  • Ensure your desired loan amount doesn’t exceed the FHA loan limits
  • Upfront and annual mortgage insurance
  • Positive lending history, no reports of delinquency 
  • Verified employment and income history with documentation supporting 

The property or project you’re going to build must meet specific requirements as well. This includes:

  • The loan cannot exceed the county’s maximum loan limit
  • Type of property/project: The physical location of the property must be approved along with the type of project you are building. 
  • Property inspection 

Lastly, the contractor must provide the required licensure, liability insurance, and a minimum amount of experience building homes.

Before you meet with a professional, write down any questions you have in regards to the requirements. That way you know if an FHA construction loan will be your best option.

Get started with GO Mortgage

While the process may seem daunting, rest assured you can build the home you’ve been waiting for when you work with the right FHA construction loan lenders.

GO Mortgage has a history of making dream homes happen with their home loans.

Request a consultation with a home loan advisor to discuss their experience and how they can help you. 

Get in touch today
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