An FHA construction loan can help you finance the entire construction cost (the land, materials, and labor) of building your own home or buying a fixer-upper. Backed by the Federal Housing Administration (FHA), these construction loans offer more flexibility, lower down payment requirements, and a chance to finance a home that doesn’t meet traditional lending standards.
According to Clever's 2025 American Home Buyer Report, 62% of home buyers prioritized affordability in finding a house, citing high home prices and mortgage rates. FHA construction loans are a solid way to make buying a new house more affordable.
Here’s what you need to know about FHA construction loans and whether they’re the right mortgage option for you.
🏗️ Thinking about building a home with an FHA loan? Connect with a local real estate agent through Clever’s Concierge Team. Get free, no-obligation advice on how to navigate the FHA construction loan process and take your first step toward a custom-built home. Connect with Clever today.
Types of FHA construction loans
FHA One-Time Close Construction-to-Permanent Loan
This loan is geared toward building a home from the ground up. It combines the financing for land (if needed), the construction, and a long-term FHA mortgage into a single loan. You close on a purchase once before the construction starts, and your loan automatically converts into a traditional FHA mortgage when the construction is complete.
Let's say you want to build a home with estimated construction costs of $270,000 on land that costs $50,000. Instead of applying for separate two separate loans for the land and construction, you apply for a $320,000 construction-to-permanent loan.
FHA Rehabilitation 203(k) Loans
203(k) loans can be ideal if you want to buy a fixer-upper or renovate your current home. It lets you roll your renovation costs into your mortgage.
There are two types of FHA 203(k) loans:
- Standard 203(k) for major renovations or structural work over $35,000
- Limited 203(k) for minor repairs under $35,000
Let’s say you found a $275,000 home with a leaking roof and a kitchen that needs remodeling. You can apply for a $325,000 standard 203(k) loan: $275,000 to buy the home and $50,000 for major repairs.
How FHA construction loans work
First, you’ll need to apply for financing through an FHA-approved lender that will review your credit, income, employment history, and debt-to-income (DTI) ratio. Once approved, you must hire a licensed contractor or builder who is familiar with the FHA property guidelines.
The lender then reviews your construction plans in detail, including architectural drawings, cost breakdowns, and proposed timeline. An FHA-approved appraiser will provide what’s called an “as completed” estimate of what your home will be worth once it’s done. This step is crucial because it helps the lender determine how much loan you may be able to borrow.
If everything is okay, you’ll now move to closing. Unlike conventional construction loans that require two closings — one for the construction and another for the mortgage — FHA construction loans have one closing up front.
During the construction or renovation phase, the lender releases the funds in installments, called "draws." These draws are tied to specific milestones in the project, such as laying the foundation. Before the lender releases each draw, an inspection is done to make sure that the builder completed the work as agreed.
While your home is being built or renovated, interest will typically accrue only on the loan amount that the lender has disbursed so far, rather than the full amount. This helps keep your payments more manageable during construction, when you may also be paying rent or other housing expenses.
After the construction is complete, the lender will order a final inspection to ensure that the home meets FHA’s safety and livability standards. If everything checks out, your loan will convert into a traditional FHA mortgage, and you’ll start making full monthly payments on the principal, interest, property taxes, and insurance.
Requirements for an FHA construction loan
For an FHA construction loan requirements, lenders look at:
- Your credit score: at least 580, though some lenders do accept scores as low as 500
- Your planned down payment: 3.5% if your credit score is 580+ or 10% if it’s between 500 and 579
- Your DTI ratio: usually capped at 43%
- Planned occupancy: primary residences only
- Loan limit: shouldn’t exceed the FHA limits for that year
- Your income: Lenders will review your pay stubs, bank statements, and tax returns.
- Builder or contractor approval: licensed and vetted by the lender
- An appraisal: The home must meet FHA minimum standards after construction or renovation.
If you don’t think you’ll qualify for an FHA construction loan, several grants to build, buy, or repair a home.
🔍 Thinking of buying a fixer-upper?
Clever can connect you with one of the top real estate agents in your area.
✅ Work with a full-service realtor to find a house that needs renovation.
✅ Apply for the right construction loan with FHA-approved mortgage provider.
✅ You'll earn cash back if you purchase your home in a qualifying state.
How do closing costs work for an FHA construction loan?
With FHA construction loans, you’ll close before the construction or renovation begins. Closing costs range between 2% and 6% of the loan amount, which may include the loan origination fee, title insurance, earnest money, and prepaid costs.
You’ll also pay a 1.75% upfront mortgage insurance premium (UFMIP), often called the FHA funding fee. Some lenders can roll this cost into your loan balance.
Difference between FHA construction loans and conventional construction loans
If you’re not sure whether to apply for an FHA construction loan or a conventional construction loan, this comparison will help you make an informed decision:
| Feature | FHA construction loan | Conventional construction loan |
|---|---|---|
| Min. credit score | As low as 580 | Typically 620 |
| Down payment | 3.5% for scores 580+ or 10% for scores between 500 and 579 | 20% |
| Mortgage insurance | Required for life of loan | If you put down less than 20% |
| Fixer-upper option | Yes, a 203(k) loan | Rarely available |
| Closing | One-time close | Often two closings (construction and mortgage) |
When an FHA construction loan makes the most sense
First-time home buying
If you don’t qualify for conventional construction loans that have stricter requirements, an FHA construction loan can help you either build your house from the ground up or buy a fixer-upper without needing good credit and much money to put down.
Convenient closing
You only go through the closing process once, instead of dealing with two separate closings like many conventional construction loans require. This means lower fees, less paperwork, and no need to reapply for a mortgage when the construction or renovation is finished.
Affordability
You might want to extend your search beyond your current state. Many people are finding better deals outside by building or buying a house out of state, where construction costs and home prices are lower.
Bottom line: FHA construction loans put new builds within reach
If you’re open to building a home from scratch or buying a fixer-upper, an FHA construction loan can put homeownership within reach. FHA loans often have a low barrier to entry, and the one-time close makes the process even simpler.
🔨 Ready to build your dream home with a low down payment? Clever’s Concierge Team can match you with a top local agent who understands FHA construction loans. Get expert guidance—totally free, no pressure. Connect with a Clever agent today.