What an FHA construction loan is
The FHA One-Time Close (OTC) construction-to-permanent loan is a single FHA-insured mortgage that covers three things at once:
- The lot (or your existing lot equity)
- The construction of the home
- The permanent 30-year mortgage once the build is done
You close once, lock the rate up front, and the loan automatically modifies to a standard FHA mortgage when the certificate of occupancy is issued. No second application, no requalifying, no second set of closing costs.
Compare that to a "two-time close" (a short-term construction loan plus a separate end loan): two applications, two rate locks, two closings, and the risk that rates or your credit have changed by the time construction wraps.
Who qualifies
- Credit: 580 FICO minimum per FHA; most OTC lenders overlay 640–680.
- Down payment: 3.5% of total acquisition cost (lot + build).
- DTI: Up to 45–50% with compensating factors; 43% is the safe target.
- Occupancy: Primary residence only. No investment or second homes.
- Property type: 1-unit site-built, modular, or manufactured (with restrictions).
- Loan limits: Same FHA county limits as a purchase — check your county.
Builder and contractor requirements
FHA does not let you build the home yourself. You must hire a licensed, insured general contractor with a documented track record of similar projects. Before the loan closes, the lender collects:
- Contractor's license, insurance, and bonding
- Two to three years of completed-project references
- Financial statements and credit review of the builder
- Fixed-price construction contract (cost-plus is generally not allowed)
- Full plans, specs, and a detailed cost breakdown
- Builder's risk insurance for the construction period
Some lenders maintain an approved-builder list; if yours isn't on it, expect a 2–4 week approval process for the contractor before you can close.
How draws work
After closing, loan funds sit in a construction escrow and are released to the builder in draws as work is completed. A typical schedule:
| Draw | Trigger | Typical % |
|---|---|---|
| 1 | Foundation poured | 15–20% |
| 2 | Framing / rough-in complete | 25–30% |
| 3 | Drywall + mechanicals | 20–25% |
| 4 | Interior finish | 15–20% |
| 5 | Final CO + inspection | 10–15% |
Each draw requires an inspection. Interest accrues on the drawn balance only, and on a true One-Time Close no monthly payments are due until the loan converts.
Sample cost: FHA construction vs conventional construction
$400K total acquisition (land $80K + build $320K), 700 FICO, 6.75% rate:
| Line | FHA OTC (3.5%) | Conventional OTC (10%) |
|---|---|---|
| Down payment | $14,000 | $40,000 |
| Loan (with upfront MIP) | $392,755 | $360,000 |
| Principal & interest | $2,547 | $2,335 |
| Tax + insurance | $500 | $500 |
| Monthly MI | $180 (0.55% MIP) | $180 (PMI) |
| Total PITI | $3,227 | $3,015 |
| Cash to close (est.) | ~$18,000 | ~$46,000 |
FHA runs about $200/month more but needs $28K less cash to break ground. For buyers with strong income and thin savings, that's usually the whole calculation.
Underwriting: what to prepare
- 2 years W-2s + most recent 30 days of paystubs (or 2 years returns if self-employed)
- 2 months of bank statements — reserves matter more on construction files
- Signed fixed-price construction contract with detailed cost breakdown
- Plans, specs, and a plot plan
- Executed lot purchase contract (or deed if you already own it)
- Builder package: license, insurance, financials, references
- Appraisal based on plans + specs (subject to completion)
Where FHA construction gets tricky
- Contingency reserve. Lenders require a 5–10% contingency line baked into the loan for cost overruns. Any funds not used are applied to principal at conversion.
- Timeline caps. FHA expects construction to finish within 12 months. Extensions are possible but require lender approval.
- Change orders. Any material change to the plans mid-build requires re-approval and can trigger a new appraisal.
- Lender scarcity. Fewer than 1 in 10 FHA lenders offer the One-Time Close product. Start builder + lender search together.
When FHA construction is the right call
- You want to build (not buy) with the lowest possible down payment
- 640+ FICO, DTI under 45%
- You already own or are buying a buildable lot
- You have a licensed GC lined up with a fixed-price contract
- You'd rather lock one rate now than gamble on two closings
Where to go from here
- Compare FHA against Conventional — same logic applies to construction financing.
- How lenders count your DTI on a construction file
- Take the Scorecard — RED will flag if OTC is a fit.