FHA construction loans make custom home building accessible to borrowers who don't have the 20–25% down payment typically required for conventional construction financing. With as little as 3.5% down and more flexible credit requirements, FHA construction loans open the door to homeownership for a broader range of buyers. Here's everything you need to know about FHA construction loans.
What Is an FHA Construction Loan?
An FHA construction loan is a government-backed construction loan insured by the Federal Housing Administration. The FHA doesn't lend money directly — it insures loans made by approved lenders, reducing the lender's risk and allowing them to offer more favorable terms to borrowers who might not qualify for conventional financing.
The most common FHA construction loan product is the FHA One-Time Close Construction Loan (also called the FHA Single Close Construction Loan), which combines the construction loan and the permanent mortgage into a single product with one closing, one set of closing costs, and one loan application.
FHA One-Time Close vs. FHA 203(k)
There are two primary FHA construction loan programs. The FHA One-Time Close program is for new construction — building a home from the ground up. It covers the construction phase and converts to a permanent FHA mortgage upon completion. The FHA 203(k) program is for renovation and rehabilitation of existing properties, not new construction. If you're building new, you want the One-Time Close program.
Down Payment Requirements
The FHA One-Time Close requires a minimum down payment of 3.5% for borrowers with credit scores of 580 or higher. Borrowers with scores between 500 and 579 can qualify with a 10% down payment. This is significantly lower than the 20–25% typically required for conventional construction loans, making FHA construction loans an important option for buyers with limited cash reserves.
If you own land, its equity can count toward the down payment requirement. If the land is gifted or purchased at a discount, the difference between the purchase price and appraised value may also count as equity.
Credit Score Requirements
The FHA's minimum credit score for the 3.5% down payment option is 580. However, individual lenders often impose their own "overlays" — additional requirements beyond the FHA minimums. Many FHA-approved lenders require a minimum score of 620 or 640 for construction loans, even though the FHA technically allows 580. Shopping multiple lenders is important to find one whose overlay requirements match your credit profile.
Loan Limits
FHA loan limits vary by county and are adjusted annually. In 2024, the FHA loan limit for a single-family home ranges from $498,257 in low-cost areas to $1,149,825 in high-cost areas. If your construction budget exceeds the FHA loan limit for your county, you'll need to either reduce the project scope, increase your down payment to cover the excess, or use a conventional construction loan.
Mortgage Insurance Requirements
All FHA loans require mortgage insurance, which adds to the overall cost of financing. FHA mortgage insurance includes an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, typically rolled into the loan balance, and an annual mortgage insurance premium (MIP) that ranges from 0.45% to 1.05% of the loan balance, paid monthly. For a $400,000 FHA construction loan, the UFMIP would be $7,000, and the annual MIP might add $200–$350 per month to your payment.
FHA mortgage insurance remains in place for the life of the loan if your down payment is less than 10%. If you put 10% or more down, MIP can be removed after 11 years. This is an important consideration when comparing FHA and conventional options.
Property and Construction Requirements
FHA construction loans have specific requirements for the property and construction. The home must be a primary residence — FHA loans are not available for investment properties or second homes. The construction must meet FHA minimum property standards, which are similar to conventional standards but include specific requirements for health and safety features. The contractor must be licensed, insured, and approved by the lender. The home must be appraised by an FHA-approved appraiser.
How to Apply
The application process for an FHA One-Time Close construction loan follows these steps: find an FHA-approved lender who offers the One-Time Close program (not all FHA lenders offer construction loans), get pre-qualified to understand your borrowing capacity, finalize your construction plans and contractor selection, submit a complete application with all required documentation, go through underwriting and appraisal, close on the loan, and begin construction with draws released at each milestone.
Ready to explore FHA construction loan options? Connect with a construction loan specialist who can help you find FHA-approved lenders and determine whether an FHA construction loan is the right fit for your project. Once your home is built, use Custom Home Advisor to find qualified builders in your area.