How to Get an FHA Construction Loan for Your New Build

If you’re hoping to build or renovate a house that you don’t yet own, then an online search might have offered up the solution of an FHA construction loan. But search results won’t help you find lenders who supposedly offer these loans; after calling a few, you’ve likely heard some version of “we don't really do those." If that's where you are right now, you're not doing anything wrong, and you're not the only one. The single biggest obstacle with this loan isn't your credit score or your down payment. It's finding someone who will write an FHA construction loan.

Here's the first thing that will save you time: The loan product you're looking for is almost always sold under a different name. Lenders call it an FHA One-Time Close loan, or OTC, not an "FHA construction loan." Search that exact phrase and you'll surface real lender pages instead of review sites listing reasons a lender won't help you.

Much of what follows comes straight from John David Adams, a loan officer at Planet Home Lending who has spent 23 years in the business and specializes in FHA and VA construction and renovation lending. He closes these loans, so the guidance here is grounded in what he sees approved and what falls apart, not in what the brochures promise. His one-line summary for anyone starting out: you don't have to settle, but it does take time, and it starts with finding your builder before you fall for a lot.

One quick clarification first, because it trips people up constantly: an FHA construction loan is not the same as a standard FHA loan. A standard FHA loan buys a house that already exists; an FHA construction loan finances a home you're building from the ground up.

What is an FHA construction loan?

An FHA construction loan is an FHA-insured mortgage that rolls your land, your construction costs, and your permanent mortgage into a single closing for a home you intend to live in as your primary residence. The technical name is "construction-to-permanent," but you'll rarely see lenders use it. On their product pages it's almost always called One-Time Close (OTC).

The "one-time" part is the whole point. You close once, the loan funds the build in stages, and when construction wraps and the home passes its final inspection, the loan converts into a standard FHA mortgage at the rate you locked. A standard FHA purchase loan finances a house someone else already built and closes in a single step, with no construction phase at all.

It's also a different animal from an FHA 203(k) loan. A 203(k) finances the purchase and renovation of an existing home; OTC finances ground-up new construction.

Search "FHA One-Time Close," not "FHA construction loan." This is the term lenders use on their own pages. The construction-loan phrasing mostly surfaces review sites; the OTC phrasing surfaces lenders who originate the product.

A few quick numbers to know going in that are set by FHA's rulebook:

• 580 credit score gets you the 3.5% minimum down payment; a score of 500–579 requires 10% down.[1] 
• Primary residence only. No investment properties, no second homes.
• 2026 county loan limits cap the loan size, from $541,287 in low-cost counties to $1,249,125 in high-cost areas.[2]
• A licensed builder is required. You can't act as your own general contractor.

Types of FHA construction loans

Three FHA products get lumped together under "construction," and they solve different problems.[3]

Note: The 203(k) Limited cap is $75,000, not $35,000. HUD more than doubled it, effective for case numbers assigned on or after Nov. 4, 2024, and extended the Limited rehab window to nine months.[3]

For ground-up building, there's also a fallback worth knowing about: the two-time close. Instead of one OTC loan, you take a short-term construction-only loan from a regional or community bank, build the house, then refinance into a permanent FHA, VA, or conventional mortgage once it's done. Some borrowers go this route when no local lender offers true OTC, but the costs stack up.

Adams only writes OTC, and he's blunt about the math. If you're not paying closing costs "more than 2-3 times in the process, OTC is much better financially for somebody who's not looking to pay deed stamps and title insurance multiple times."

Every separate close means another round of title insurance and fees, and in states like Florida that bill at each closing, those costs quietly whittle away your equity.

He also warns against the most common version of the two-step plan: buying a lot first, then going looking for a builder. He's seen buyers close on land only to learn the home they wanted won't work on the parcel they bought. When you can find OTC, putting the land and the builder together in one transaction protects both your money and your plans.

Do you qualify? Requirements and key numbers

The published requirements are one thing, but what you'll really get quoted depends on the lender, your reserves, and (more than many borrowers expect) your builder.

"It starts with the builder,” Adams notes. “The qualifications for the customer are pretty easy, but the builder is where people get held up." This table puts the rulebook and the real-world version side by side.[1]

The gap between FHA guidelines and what lenders require is due to lender overlays. FHA sets a floor; individual lenders layer their own stricter rules on top, and construction lending is where those overlays get heaviest.

Jeffrey Hensel, a broker associate at North Coast Financial and a California real estate licensee since 2006, describes the quotes some borrowers report seeing: "3.5% minimum down payment quote for FHA construction loans? No lie. But that's unlikely to get you approved. The truth is most borrowers are quoted anywhere between 20% down plus an additional 15% of liquid reserves. This is a case where the bank builds its own overlays to the FHA's guidelines. FHA sets the floor. The lender adds their overlays."

Adams says the contingency most borrowers run into is built into the loan, not pulled from their pocket: a roughly 5% cushion added on top of the build cost. "Let's say the builder will build the house for $100,000, we'll build the appraisal around $105,000 because we want them to have additional funds in case there are changes during the process. If they don't spend it, it'll go back down to the official balance of the loan; the borrower won't get handed that in cash."

Separate from that, he looks for a few months of cash reserves on hand after closing and pays close attention to who's covering interest during the build, because no one wants a borrower stuck paying for a home they can't live in yet. Although 3.5% down is a real floor, it can be an uncommon outcome on construction; a blanket "15% liquid" requirement isn't universal, and the exact overlay you face depends heavily on the lender you find and the builder you hire.

Property type eligibility

FHA OTC works for a one-unit primary residence, and the build type matters more than rural buyers often expect:[1]

• Stick-built homes: Eligible
• Modular homes: Eligible
• Double-wide manufactured homes: Eligible
• Single-wide mobile homes: Excluded

In practice, experienced originators handle a wider range than the handbook spells out. Adams says his shop does manufactured-home setups regularly, where a buyer can choose the land, pick a home, and move in within three to six months, and he even finances barndominiums, which used to draw pushback. If you're planning a manufactured build, confirm the specific model qualifies as double-wide or modular before you sign anything.

Land equity and how it counts toward your down payment

If you already own your lot, that equity can count toward the investment FHA requires, which is exactly why land-rich buyers gravitate toward this loan.

For example: Your land appraises at $80,000 and your total project cost (land plus construction) is $400,000. That equity functions like a 20% stake before you put in a dollar of cash. You'll need a current appraisal to document the land value.

Adams says equity often does more work on a conventional loan than on a government one: "The equity position is more easily used on a conventional, because a lot of equity on government loans isn't used as a form of down payment, but it is on conventional." So if you're describing yourself as "lower income" but sitting on $150,000–200,000 in equity from a home you're about to sell, price a conventional loan first, because it tends to take less cash out of your pocket to close. Your asset position, not your income, is what lenders are reading. If conventional doesn't fit, the government products are the next stop.

2026 FHA loan limits

For 2026, single-family FHA loans run from a $541,287 floor in low-cost counties to a $1,249,125 ceiling in high-cost areas.[2] Those limits are pegged to the national conforming loan limit, which rose to $832,750 for 2026.[4]

Your county sits somewhere on that range, so check the exact figure with HUD's county-level lookup tool before you fall for a house plan you can't finance.

FHA construction loan vs. the alternatives

Before you commit to FHA, it's worth a 60-second self-check against the other ways to finance a build or a renovation. For some borrowers, FHA is clearly the right call; for others, a 0%-down option or a no-lifetime-MIP conventional loan quietly beats it.

Sources: VA, USDA Rural Development, Fannie Mae HomeStyle Renovation, Freddie Mac CHOICERenovation[5] [6] [7] [8]

If you're a veteran or eligible service member, VA OTC almost always beats FHA, with 0% down and no mortgage insurance. If you're building in a USDA-eligible rural area and meet the income limits, USDA OTC is a strong 0%-down option. If you have a 700+ score and can put 10%–20% down, price conventional one-time close, because FHA's mortgage insurance usually runs for the life of the loan and makes it the costlier product over time.

The best-case scenario for FHA construction is a capital-constrained borrower with limited liquid reserves, and even then, lender overlays may pull your real terms toward conventional anyway.

Rates, costs, and what you'll really pay

As of mid-June 2026, a standard FHA 30-year is averaging right around 6.25%.[9] FHA construction loans run higher during the build, roughly 8–10%, which works out to about two to four percentage points above the standard rate.[10] The reason is straightforward: until the house exists, there's no finished collateral, so the lender prices in that risk and then steps the rate down to your locked permanent rate when the loan converts.

That conversion is where OTC earns its keep. Because your permanent rate is locked at the construction closing, you don't take market risk during the months you're building.

Adams's shop locks that rate up front and doesn't offer a float-down, and he's skeptical of the feature anyway, since the cost usually gets buried back into the pricing. With a two-time close, you re-rate when you refinance at the end, which can sting in a rising-rate market.

There are other costs that come with any FHA loan:

• Upfront mortgage insurance premium (UFMIP): 1.75% of the base loan amount, usually rolled into the balance. On a $400,000 loan, that's $7,000.[11]
• Annual mortgage insurance premium (MIP): Commonly 0.55% per year for a 30-year loan with less than 5% down (the schedule ranges 0.15–0.75% by loan size, term, and down payment). On that same $400,000 loan, 0.55% is about $2,200 a year.[11] 
• How long you pay MIP: For the life of the loan if you put less than 10% down; 11 years if you put 10% or more down. This is the cost that most often tips the math toward conventional for borrowers who can swing a bigger down payment.[1] 
• Closing costs: Generally 2–6% of the loan amount, so $8,000–24,000 on a $400,000 loan, covering origination, title, and prepaid fees.[12] 
• Per-draw inspection fees: Construction adds line items a purchase loan doesn't, such as draw inspections around $375, change-order fees near $120, and reinspection fees around $225.[12] 
• Contingency reserve: Lenders typically build a 5–10% cushion into the loan for cost changes during the build. As Adams explained above, that money lives in the loan and returns to your balance if it goes unused, rather than being cash you hand over at closing.

During construction, you generally pay interest only on the funds that have been disbursed so far, not the full loan balance, which keeps your cash-flow manageable while the house gets built.[1]

The process and a realistic timeline

The clean version of this timeline assumes nothing changes, and something always does. Use these ranges as planning numbers, not promises.[12]

Treat the 12-month clock as a hard constraint, not a comfortable target. Adams cautions that running past the window means extension fees and penalties that can get expensive fast, and the fix starts well before the first nail. He vets the contractor thoroughly and won't release funds until permits are in hand, both because a slow or undercapitalized builder is the surest way to blow the timeline. For a sense of real build costs in your market, the NAHB Construction Cost Survey breaks down spending per square foot by category.[13] 

Since the NAR settlement took effect on Aug. 17, 2024, buyer-agent compensation is negotiated separately and spelled out in a written buyer-broker agreement, so budget for that conversation up front.[14]

Common pitfalls and how to avoid them

Most of what derails these loans is predictable, which means most of it is avoidable. Here's what to watch for:

Your builder isn't FHA-experienced, or won't take FHA work

Plenty of general contractors decline FHA jobs because of the paperwork, draw inspections, and slower payment cycles. Beyond willingness, vet for substance. Adams looks for a builder who has been in the business a while, comes with referrals, isn't in bankruptcy, and has no legal actions against them, and he warns against leaning on someone else's contractor as a qualifying name rather than the person doing the work.

He's seen a builder fail to figure out how to raise a foundation out of a flood zone, the kind of problem an experienced GC heads off early. Lock in your builder before you apply; changing the spec mid-process can trigger a re-approval you don't want.

You want to be your own general contractor

FHA construction lending effectively rules out owner-builders, even licensed ones. Adams is direct about why: if the owner doing the work gets hurt or runs out of money mid-build, the lender is left holding a half-finished house it has no clean way to complete.

"We can't sue our own customer; we've got to be in charge of somebody who's building the house." If you're set on self-building, conventional construction financing is your path, not FHA.

Overlays turn 3.5% down into something larger

Borrowers walk in expecting the headline minimum and walk out needing more cash, especially when the lender doesn't already know the builder. Plan your finances around the overlay reality, not the brochure.

Permits run long and change your rate

OTC locks your permanent rate at construction closing, but rate locks expire. With permits running anywhere from 4 to 24 weeks depending on your jurisdiction, a slow approval can blow the window.[12] Ask for a longer rate-lock period up front, even if it costs a few basis points.

Cost overruns blow past your contingency

Build budgets have whipsawed in recent years; one owner-builder aimed for $200 a square foot and landed near $275, a jump of nearly 40%. A 5%–10% contingency disappears fast in a volatile materials market, and if costs push the project above your county's FHA limit, you're stuck either bringing more cash or scrapping the plan.

"If you exceed the lending limits, you've got to either come up with more cash or scrap the project," says Rami Sneineh, owner and licensed insurance producer at Insurance Navy.

You assume your manufactured home qualifies

Double-wide and modular homes are eligible; single-wide is not. Rural buyers planning a manufactured build get blindsided by this, so confirm the model before you commit.

Your plans and specs aren't finished

The most common reason an OTC file stalls between approval and closing, in Adams's experience, is borrowers who haven't locked in a full schedule of materials and labor, or who keep changing their minds once work begins.

Once the appraisal is in, he says, closing moves quickly, but only if the selections are final. Decide what you want, document it, and hold the spec.

You don't verify the contractor's license

Check license status with your state contractor licensing board before signing anything. Draw-fund theft is rare, but it's devastating when it happens.

How to actually find a lender

The HUD-approved lender list looks like the obvious starting point, and it's where most borrowers waste their first few weeks. The problem is that being "FHA-approved" only means a lender writes standard FHA purchase loans; it says nothing about whether they originate construction loans, and many lenders on the list haven't written one in years. The underwriting is heavier, the volume is lower, and plenty of shops would rather close several standard loans in the time one construction loan takes.

What you want instead is a lender that keeps the loan in-house and runs the construction process itself. Adams works for a direct lender that holds these loans on its books, and that's the model he'd tell a borrower to look for. "If I was looking for somebody to do these loans, I'd look for someone who has total control over the process. Do they have control over the draws?"

A broker who routes your file to whoever buys it on the secondary market doesn't control the draws or the underwriting, which is where construction loans live or die.

So skip the cold-call marathon and take the steps listed below instead.

1. Search "FHA One-Time Close," not "FHA construction loan." The OTC phrasing surfaces lenders who originate the product.
2. Start with regional and community banks. They tend to hold construction loans on their own books and can give you a straight answer fast, often on the first call.
3. Try credit unions next. They're community-focused and often more flexible on construction underwriting than the big banks.
4. For rural builds, call your Farm Credit association. Regional Farm Credit lenders such as Farm Credit East and Greenstone offer rural home loans that can substitute for or pair with FHA OTC.[15]
5. Vet mortgage brokers before you submit anything. Some list FHA construction loans without originating them, and some that broker the product layer on extra overlays that mean more money down. Confirm on the first call that the shop originates and controls the loan, not just markets it.
6. Treat big banks as a long shot. They hold FHA approval but rarely write OTC.

The HUD lender list is fine as a starting reference, just not an authoritative one for construction. If you're heading down the renovation path instead, the HUD 203(k) Consultant Roster will help you find the consultant a Standard 203(k) requires.

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