FHA Construction Loans: One-Closing Financing to Build Your Home

How an FHA construction loan works

HUD describes the CP program as combining a short-term construction loan with a long-term FHA mortgage in a single closing before construction begins. In practice:

1. You contract with a builder and either own the land or buy it at closing.
2. You close once. The land is paid for or paid off at closing, and the rest of the loan is placed in an escrow account.
3. Construction is paid for through draws. The lender releases escrowed funds as the work progresses, and HUD requires the lender to get your written authorization for each draw before paying the contractor.
4. The loan converts to the permanent FHA mortgage after construction. Any unspent escrow goes toward your principal balance.
5. Endorsement and amortization follow completion. The loan must be endorsed for FHA insurance within 60 days of the final inspection or certificate of occupancy (whichever is later), and amortization must begin no later than the first of the month following that 60-day window.

One important disclosure: HUD requires the lender to tell you the mortgage is not eligible for FHA mortgage insurance until after a final inspection or certificate of occupancy, whichever is later. That's one reason lenders are careful about builder quality and completion.

Who can use one

• Primary residences only. FHA loans are for a home you'll live in as your principal residence; they can't be used for vacation homes or investment properties.
• A builder who is a licensed general contractor. HUD's rule is that the borrower must have contracted with a builder who is a licensed general contractor. The borrower can act as their own general contractor only if they are a licensed general contractor themselves. Individual lenders may add their own builder requirements (experience, insurance, references). See also owner-builder loans.
• Land you own or are buying. You can own the lot already or buy it with the construction loan.
• Meeting FHA credit and income standards, plus the lender's own. Lenders can add their own requirements on top of FHA's minimums, called overlays, so qualification can differ by lender.

Down payment and credit scores

FHA's standard minimum required investment is 3.5% of the adjusted value for borrowers with a credit score of 580 or higher, which means maximum financing of 96.5%. Borrowers with scores from 500 to 579 are limited to 90% loan-to-value (a 10% minimum investment), and scores under 500 are not eligible. Many lenders set higher score minimums than FHA does.

Land equity can count. HUD lets you satisfy the minimum required investment with cash toward the acquisition cost or with land equity. If you already own the lot, its value (net of what you owe) may do much of the work.

How the maximum loan is calculated. The maximum mortgage is the FHA loan-to-value percentage applied to the lesser of the appraised value or the documented acquisition cost. For construction, acquisition cost includes the builder's price (or subcontractor bids and materials if you own the land), borrower-paid options, closing costs on interim financing, and the land. If you've owned the land for six months or less, or are buying it now, the land counts at the lesser of its cost or appraised value. If you've owned it longer than six months, or received it as an acceptable gift, it counts at appraised value.

FHA mortgage insurance

Every FHA loan carries mortgage insurance, paid in two parts:

• Upfront mortgage insurance premium (UFMIP): 1.75% of the base loan amount, which can be financed into the loan.
• Annual mortgage insurance premium (MIP): charged monthly. The rate depends on the mortgage term, the loan amount and the loan-to-value ratio, so it differs from one borrower to the next, and HUD has changed the schedule over the years. Ask your lender for the exact figure on your loan, and see HUD's current schedule in Mortgagee Letter 2023-05 and Appendix 1.0 of the FHA Handbook 4000.1.
• How long annual MIP lasts: for loans with terms longer than 15 years, annual MIP is charged for 11 years if your loan-to-value at origination is 90% or less (a down payment of at least 10%), and for the full mortgage term if it's higher.

MIP adds to your monthly cost, so run your numbers with the construction loan calculator and compare with conventional options.

FHA loan limits for 2026

FHA limits how much you can borrow, and they vary by county. For 2026, HUD set the one-unit single-family limit at $541,287 in the lowest-cost areas (the "floor") and $1,249,125 in the highest-cost areas (the "ceiling"). Most counties fall somewhere between. For example, HUD's 2026 one-unit limit for Kootenai County, Idaho (Coeur d'Alene) is $572,700. Look up your county's exact limit using HUD's FHA mortgage limits lookup. If your budget exceeds the limit, you can reduce the scope, bring more cash, or look at conventional construction financing.

How the interest rate works

During construction, an FHA CP loan's rate may float. HUD requires an agreement between you and the lender that:

• documents the range within which the rate can float during construction,
• documents the point at which the rate is locked in,
• sets a maximum rate for the permanent mortgage, and
• allows you to lock in at a lower rate if one is available and you haven't already locked.

The lender must qualify you at the maximum rate the permanent loan could be set at, so confirm that number with your lender. For market context, see construction loan rates.

FHA CP vs. other FHA programs

• FHA 203(k) is for renovating or rehabilitating existing homes, not building new ones.
• Building on Own Land is a separate FHA product for permanent financing of a newly constructed home on land you own, and it may be used to pay off a construction loan you got elsewhere. That's a two-step approach, unlike the CP loan's single closing.
• Conventional, VA and USDA options exist too: see construction-to-permanent loans, VA construction loans, and the USDA program.

What FHA and your lender will check

• Plans, specifications and the builder's contract, including the builder's price to build.
• Appraisal based on the plans and specs, meeting FHA's property standards.
• Your income, assets, credit and debts, qualified at the maximum permanent rate.
• Source of funds for any cash you contribute to the project.
• Land documents showing what you paid and when, or evidence of ownership, plus a payoff of any liens.
• Completion documents at the end: final inspection or certificate of occupancy, evidence the construction escrow was fully used, and a title update showing the home is free of other liens.

Finding a lender

Not all FHA lenders do construction loans. Ask any lender you talk to how many FHA construction loans they've closed, how they handle draws and inspections, and what builder requirements they apply. Our construction loan requirements page and document checklist will help you prepare.

Plan the whole project

• Estimate what your build will cost with a free estimate from CustomHomeQuote.
• Learn how to evaluate builders in CustomHomeAdvisor's guide to choosing a custom home builder, then check track records at CustomHomeBuilderReviews.com.

Get matched with an FHA construction-loan specialist → Free, no obligation.