FHA Construction Loans Compared With FHA 203(k) Rehab Loans

April 13, 2021

There are two types of FHA home loan that involve hiring contractors and doing construction work. One is called the FHA One-Time Close construction loan which allows you to build a home from the ground up on your own lot. The other is called an FHA 203(k) Rehabilitation mortgage and it is used to repair or renovate a home.

Similarities Between the Two Types Of Loan

How are One-Time Close construction loans and FHA 203(k) Rehab loans similar? They both require the use of approved builders to do the work, and they both require a minimum down payment.

FHA One-Time Close loans have a 3.5% down requirement, USDA and VA versions of the One Time Close loan have different rules and allow zero down transactions for qualifying applicants.
Both types of loan can be used for major structural work including load-bearing walls, etc. Both types of loan forbid cash out for the borrower--all funds used as a draw or paid out of escrow must be for specific expenses directly related to the project.

For both types of loan the borrower and lender will negotiate the interest rate, establish a timeline for project completion, and for both loans the borrower may be required to live elsewhere while the work is being completed.

Differences Between the FHA One-Time Close Construction Loan and the FHA 203(k) Rehab Loan

The FHA One-Time Close mortgage does not come as a refinance loan option, but the FHA 203(k) rehab loan can be used to buy or refinance a property that needs repair work.

The 203(k) mortgage or refinance loan can be applied for as a “limited” version with a smaller amount of money, no minimum repair cost, but there are restrictions on the type of work you can do with the limited 203(k).

The 203(k) mortgage option may allow you to apply for down payment assistance for your loan; most participating lenders offering an FHA One-Time Close mortgage or other types of construction loans similar to it (VA and USDA versions) don’t allow borrowers to use down payment assistance programs to build a home from the ground up.

For both types of loan your down payment funds must be sourced properly, but for One Time Close mortgages you may be able to skip the down payment altogether if you own land with equity in it that is intended to be the site where your home is constructed.

Ask a participating lender about your options to build a home from the ground up or about buying a fixer-upper property to renovate with an FHA 203(k) Rehabilitation loan, there are plenty of good options with both programs.

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