Construction Loan Rules for First-Time Homebuyers

July 27, 2023

Are you a first-time homebuyer? If so, you have a wide range of options open to you. Some are surprised to learn that those options include the ability to build a home on your own lot using a One-Time Close construction loan. Yes, even a first-time borrower may qualify for these loans which are offered as conventional mortgages, but also as VA and FHA construction loans.

First-time homebuyers should know a few things about construction loans before committing--these things won’t discourage you from getting the loan but knowing a few simple things can change how you prepare for your new mortgage.

Down Payment Issues

A first-time homebuyer might assume certain things about the down payment process but in general all borrowers should know that when building your home on your own land, a down payment is required in most cases except VA mortgages.

Borrowers should be prepared to make the required down payment. That’s 3.5% down for FHA mortgages with qualifying FICO scores and the down payment requirement varies for conventional loans based on a number of factors.

Borrowers often choose FHA One-Time Close mortgages for the 3.5% down payment. Some who own their own loan may be able to negotiate with the lender to use land equity as the down payment. But some borrowers may hope to get out of the down payment requirement by using a down payment grant.

These grants are normally accepted by lenders (they must meet lender requirements and federal guidelines where applicable) but in the case of construction loans this is not always true. You may find lenders won’t accept down payment grants or other forms of down payment assistance for construction loans.

Construction Loans Require Some Extra Planning

Having a home built to your specifications means having architectural plans and hiring approved contractors to do your building work. First-time buyers need to know that most lenders will not allow you to act as your own builder, so don’t plan on being able to cut corners on the expenses of your construction loan by naming yourself or other family members as your builder.

Remember that you can’t be in a hurry with a construction process. You’ll need proper permits, which can take longer in crowded housing markets. You’ll need compliance inspections where applicable, pest control measures may be needed, and you may also have issues like flood zone determination before you can fully move ahead with your construction project. Build in extra time for delays, bad weather issues, and other anticipated problems.

Credit Score Requirements

If you are a new borrower, you’ll want to pay special attention to the credit requirements for construction loans. Ask your lender to tell you what the ideal FICO score ranges are for maximum financing, but be sure to start working on your credit long before you start having conversations with a lender. You’ll need a solid record of on-time payments on all financial obligations at least 12 months before you apply for the mortgage.


 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) and the VA (Department of Veterans Affairs) 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 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 and VA 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, including but not limited to: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes, Dome Homes, Bermed Earth Sheltered Homes, Tiny Homes, Accessory Dwelling Units, or A-Framed Homes.

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Please send your email request to [email protected] which authorizes FHA.com to share your personal information with one 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 $1,500,000 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.