What are the FHA loan rules for buying land as part of a construction loan? Not all borrowers own their own land. Ehen you want to build on your own lot, you may need to purchase the lot as part of the loan.

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FHA One-Time Close Construction Loan Rules for Purchasing Land

September 14, 2020

The FHA single-family loan program includes a construction loan option for borrowers (even qualifying first-time home buyers) to build a home instead of buying an existing construction house.

What are the FHA loan rules for buying land as part of a construction loan? Not all borrowers own their own land; when you want to build on your own lot, you may need to purchase the lot as part of the loan.

FHA One-Time Close Construction Loan Eligibility Rules

For this type of home loan the borrower is required to have a contact with a builder for the construction phase of the mortgage.

The builder is required to be a licensed general contractor. FHA loan rules say that the borrower may technically act as their own contractor but you may find many lenders are unwilling to consider such an arrangement unless the lender standards permit it and the borrower has experience doing so.

Remember, some lenders won’t permit this at all, so be sure to ask early if your intent is to consider being your own contractor.

Rules for Purchasing Land for the Construction Loan

FHA loan rules require the borrower to either already own the land to be built upon, OR the land must be purchased at the closing of the construction loan according to HUD 4000.1.

Furthermore, at closing time the borrower must have documentation of land ownership or acquisition of the land. HUD 4000.1 states, “A payoff statement and evidence of the actual payoff if mortgage proceeds are used to purchase or pay off debt on the land.”

When determining the adjusted value of the home (necessary to determine the final loan amount), FHA loan rules require closing costs associated with any interim financing of the land to be included in that calculation, as well as either:
  • The lesser of the cost of the land, or appraised value of the land, if the land is owned six months or less at case number assignment OR;
  • The appraised value of the land if the land has been owned for greater than six months at case number assignment, or was received as an acceptable gift.
In cases where FHA loan funds are used to purchase the land, once the cash has been disbursed for that purchase, the remainder of the mortgage goes into an escrow account that will be used during the construction phase of the loan. Under no circumstances is unrestricted cash released to the borrower  --all disbursements are made to pay for the work and other approved expenses. 

Borrowers should not expect cash back at closing except for refunds of money paid up front for items later financed into the mortgage loan amount. That said, the lender is required to get the borrower’s written authorization for each payout during the construction phase of the loan.

Once the construction phase of the loan is complete, the escrow account established before the purchase of the land must be “fully extinguished, and any remaining funds must be applied to the outstanding principal balance of the permanent Mortgage” according to HUD 4000.1, the FHA Single-Family Lender’s Handbook.

Construction Loans at OneTimeClose.com FHA, VA, and USDA: One-Time Close Loans

Want More Information About One-Time Close Loans?

We have done extensive research on the FHA (Federal Housing Administration), the VA (Department of Veterans Affairs) and the USDA (United States Department of Agriculture) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
FHA.com provides information and connects consumers to qualified One-Time Close lenders in an effort to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
Please note that investor guidelines for the FHA, VA, and USDA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs:  Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
Your email to [email protected] authorizes FHA.com to share your personal information with a mortgage lender licensed in your area to contact you.
  1. Send your first and last name, e-mail address, and contact telephone number.
  2. Tell us the city and state of the proposed property.
  3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
  4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines.  Most lenders will go up to $750,000 and review higher loan amounts on a case by case basis.   If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.

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