FHA Construction Loan. Build with 3.5% Down

An FHA construction loan is a single-close construction-to-permanent loan insured by the Federal Housing Administration. It funds the build during a construction period (typically up to 12 months), then automatically converts to a standard FHA mortgage when construction is complete. The main benefits are a low 3.5% down payment (with credit 580+), flexible credit standards, and availability anywhere in the U.S. — no rural location requirement like USDA.

Borrower requirements match a standard FHA purchase loan: primary residence, credit typically 580+ for 3.5% down (500–579 requires 10% down), and the loan must stay within FHA county loan limits. The builder must be a licensed general contractor who meets FHA and lender requirements — owner-build is not allowed unless you are yourself a licensed GC. The finished home must meet FHA property standards.

No. An FHA construction loan (one-time close / construction-to-permanent) finances a brand-new custom build. The FHA 203(k) is a renovation loan for buying or refinancing an existing home and funding repairs or remodeling. If you are building from the ground up, you need construction-to-permanent financing — not a 203(k).

A one-time close loan — also called a single-close or construction-to-permanent loan — combines the construction financing and the permanent mortgage into a single closing. One application, one approval, one set of closing costs, before construction begins. When the home is complete, the loan converts automatically to the permanent mortgage with no second appraisal and no second underwriting review. Most FHA construction loans are structured as one-time close; some lenders also offer two-close options.

Yes, in most cases. The land purchase can be rolled into the FHA construction loan, and the total loan amount (land + construction) must stay within FHA loan limits for the county. If you already own the land, its equity may count toward your down payment or acquisition cost calculation. Discuss your land situation with an FHA construction lender upfront.

FHA construction-to-permanent loans typically allow up to 12 months for the construction period. During this time, funds are disbursed in draws as each phase of construction is completed and inspected. Interest-only payments are made on the outstanding draw balance. Extensions may be possible depending on the lender if construction runs longer.

FHA construction loans carry the same mortgage insurance as FHA purchase loans: a 1.75% upfront MIP (typically financed into the loan) and an annual MIP (currently about 0.55% for most new loans), paid monthly. With less than 10% down, annual MIP generally lasts for the life of the loan. Construction-period fees and interest during draws vary by lender.

Compared with USDA: FHA requires 3.5% down (vs. $0), has no location or income limits, and uses MIP instead of USDA guarantee fees. Compared with conventional: FHA allows lower down payments and more flexible credit, but MIP lasts longer and you must use a builder who meets FHA requirements. If you qualify for USDA or VA, those usually cost less long-term; FHA is the strong fallback when you need low down payment without rural eligibility.

Often, yes. The as-completed appraisal is based on comparable finished homes, not your construction contract. A $400,000 build on a $20,000 lot routinely appraises above the combined cost because the market values the finished house. That gap is equity at move-in. It is not guaranteed — the appraisal has to support it — but it is the usual construction outcome, not a special FHA product. If you already own the land, that equity can also cover the 3.5% down payment.

Yes. For FHA construction-to-permanent loans, the builder must be a licensed general contractor who meets FHA and lender requirements — typically including insurance, experience building similar homes, and a fixed-price contract. Owner-build is not permitted unless you are a licensed GC yourself. Confirm your builder can work with FHA construction financing before you sign a contract.