What is an FHA Home Loan and Who Can Qualify?


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If you want to give your home some upkeep or build your dream home from scratch, an FHA home loan could get you there.

FHA home loans provide an option for someone looking to build or modernize a home but not necessarily meet the needs of a traditional mortgage. Thanks to the more flexible lending requirements, borrowers with low to middle incomes or below average creditworthiness still have an opportunity to own a home.

Pro tip

Before entering into any new debt, it is helpful to speak to a credit counselor who can help you fit your goals into your overall financial plan. See our guide too free credit advice.

Here’s what you should know about an FHA home loan and how it works.

What is an FHA Home Loan?

An FHA home loan is a type of mortgage that allows home buyers and homeowners to either build a new home or improve an existing home. It’s an all-in-one product; The loan covers all costs associated with your construction or renovation. The process starts with you finding a licensed contractor to do the job and then you can look for your FHA loan.

FHA-approved lenders subscribe to the loans that are insured by the Federal Housing Administration. Since these loans are for those with poor creditworthiness, the FHA guarantee will help mitigate some of the risks to the lender.

Types of FHA Home Loans

There are two main types of FHA home loans. One is for new builds while the other is for homebuyers or homeowners who want to significantly upgrade their homes.

Construction-to-permanent loans

A permanent construction loan combines a short-term construction loan with a typical FHA loan into a single product. You complete your loan once at the beginning of the process and once the home is built your loan will be converted into a long term FHA loan.

According to Nicole Christopherson, real estate agent at NMC Realty, these loans have required two closings in the past. You would complete your home loan first, and then once the home was built you would have a second call on your mortgage.

“The one-time deal from FHA is a better product because everything closes at the same time,” says Christopherson. “After the first half of the transaction is complete, there is no room for error. It enables the borrower to reserve funds and minimize their down payment.

One of the advantages of a one-time degree is that borrowers don’t have to worry about changes in their financial situation that affect their second degree.

“If anything changes in their employment or finances before this second part, it could affect the completion of their home loan,” said Christopherson. “This product combines everything.”

FHA 203 (k) Rehabilitation Loan

The FHA’s 203 (k) program enables homeowners to buy and / or renovate an existing home.

There are two kinds.

Limited 203 (k) Mortgage: This is where homebuyers and current homeowners can get anywhere from $ 5,000 to $ 35,000 to upgrade or repair their homes. New homeowners can use these type of loans to improve their homes after moving in. Homeowners can also use a 203 (k) loan to prepare their home for sale by making improvements to increase the property’s value.

Standard 203 (k) Mortgage: Here homebuyers can finance both the purchase and the renovation with a single loan. Buyers can use this type of loan to purchase a fixer-upper that is at least a year old. The loan can be used for improvements such as building changes, modernizations, additions, major landscaping, energy savings, and modernizations to eliminate health and safety risks.

Can you buy land with a building loan?

An FHA home loan will cover all construction-related costs, including land, plans, permits, fees, labor, and materials. This is good news for FHA borrowers who may not have the funds to buy the land or take out additional credit.

“An FHA home loan can be used to buy the land while a home is being built on the property,” said Eric Nerhood, owner of Premier Property Buyers, a house repairing and selling company. “Once the house is built, the construction loan is converted into a traditional mortgage.”

Who can qualify for an FHA construction loan?

The requirements for an FHA home loan are almost identical to the requirements for any other FHA mortgage. To qualify for your loan, you will need:

  • A credit score of at least 500 (or 580 for the lower deposit)
  • A deposit of at least 10% from a credit rating of 500 and at least 3.5% from a credit rating of 580
  • A debt-to-income ratio of no more than 43%
  • Private mortgage insurance in advance and annually
  • No FHA loan defaults in the past three years
  • A loan amount within the FHA loan limits

In addition to the standard FHA loan requirements, home loans also have some regulations of their own, such as: B. a contract with a licensed contractor.

“It’s common for the bank to ask the builder for approval,” says Thomas Jepsen, founder of Passion Plans, a company that connects home buyers with architects and designers. “They ensure that the builders have the necessary insurance.”

It’s also important to keep in mind that the FHA’s requirements aren’t the only ones you will struggle with. Individual lenders can also set their own requirements.

“Even if the FHA makes demands on the presentation requirements, the banks are still allowed to stack everything on top of it,” says Jepsen. “There will be lenders who won’t look at you until you have a credit score of 600, even though the actual FHA doesn’t require it.”


Unfortunately, low credit can be a barrier to buying or building a home for many, but FHA home loans can help individuals build a new home or upgrade an existing home without a below average credit score standing in the way.

Unlike typical home loans, the first step in qualifying for an FHA home loan is finding a licensed contractor. Find reputable and trustworthy contractors in your area. From there, you can visit the list of approved FHA lenders to find one in your area.


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