Quantcast

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.

FHA Rates Near 50 Year Low!

Now is the time to drop the interest rate on your 30-year mortgage or refinance into a 15-year home loan.

FHA Rates for October 21, 2020
Are You Watching Your Credit Score?

NOTICE: Some FHA mortgage lenders are substantially raising FICO score requirements during the Coronavirus crisis, even though FHA minimums remain unchanged.


- Improving Your Credit Score Has Never Been More Important -

Get started one
Get started two
Get started three
Get started four
FHA.com is a privately owned website, is not a government agency, and does not make loans.

Choose a Loan Type

FHA.com is a privately owned website, is not a government agency, and does not make loans.

FHA One-Time Close Construction Loan Rules for Purchasing Land

September 14, 2020

FHA One-Time Close Construction Loan Rules for Purchasing Land
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.

------------------------------

RELATED VIDEOS:
Your Mortgage Payment Schedule Is Called Amortization
Information About the Balloon Payment
Reliable Borrowers Can Qualify for a Cash-Out Refinance

SEE YOUR CREDIT SCORES   From All 3 Bureaus  

Do you know what's on your credit report?

Learn what your score means.


GET STARTED