How to Lower FHA Cash to Close on New Construction

The Quick Read: Lowering FHA cash to close on a new build comes down to five levers: a builder credit for closing costs, financing the upfront mortgage insurance, earnest money you have already paid, gift funds from a qualifying donor, and lender credits. Only gift funds can cover your required minimum investment. The 3.5% otherwise stays your own money, and the other levers reduce what you owe at closing without replacing it.

Most buyers assume a generous builder means a nearly cashless closing. It rarely works out that way. The rules cap what a builder can pay, and they say what the money can be used for. Below is how the pieces fit, what each lever can and cannot do, and where new builds trip people up.

What Makes Up Cash to Close on a New Build?

Cash to close is the money you bring on closing day. It equals your down payment, plus closing costs and prepaids, minus credits and money you have already paid in.

Think of it as a short formula:

• Required minimum investment
• plus closing costs (title, lender charges, recording)
• plus prepaids (first-year insurance, early tax and insurance escrows)
• minus earnest money and deposits already paid
• minus eligible credits

Closing costs and cash to close are not the same number. The federal consumer-finance regulator’s Closing Disclosure explainer separates them. Closing costs are the upfront costs other than the down payment. Cash to close is what you actually hand over, and it appears on page 3 of your Closing Disclosure.

New construction adds a few wrinkles. You may pay a deposit when you sign the builder’s contract. Upgrades chosen after signing can add costs. Your first-year homeowners insurance and escrows may be sized for a brand-new, higher-priced home. Ask for a written estimate of all of these before you sign.

The FHA Envelope You Are Working In

Across the wholesale programs Lendmire places FHA files with, the purchase framework looks like this, subject to lender guidelines and full file review:

• Maximum financing is 96.5% of the lesser of price or appraised value.
• The minimum required investment is 3.5%, with a decision score of 580 or higher.
• The home must be your principal residence, one to four units.
• A non-occupant co-borrower is allowed.
• Seller or interested-party contributions are allowed up to 6% of the price.
• County loan limits apply, and they change every year.

That 3.5% is the floor under everything else here. Every lever below works on the costs stacked on top of it.

Lever One: A Builder Credit Toward Closing Costs

A builder credit is the single biggest lever, and it has two ceilings. It can pay actual closing costs, prepaids and points, but it cannot exceed 6% of the price or the real cost of those items, whichever is lower.

In FHA terms, a builder is an “interested party.” So is the seller, a real estate agent or a developer. HUD’s interested-party contributions Q&A says contributions become an “inducement to purchase” when they exceed the actual costs, or when they exceed six percent.

Here is why that matters. An inducement is subtracted from the purchase price dollar for dollar. Underwriting then applies the loan-to-value percentage to the reduced figure. A credit that is too big does not just get trimmed. It lowers the maximum loan, which can raise the cash you need.

Three practical points follow:

• Credits cannot fund your minimum investment. HUD is explicit that interested-party contributions cannot be used for it.
• Unused credit is not paid to you. If the credit is larger than your eligible costs, the excess does not come back as cash. It may need to be cut from the contract.
• Everything must be documented. The contribution must show up in the sales contract, the HUD-92900-LT form and the Closing Disclosure.

Ask the builder to word the credit as “up to” a percentage of the price toward your closing costs, prepaids and buydown. That leaves room if your costs come in lower or higher than expected.

Credit Versus Price Cut: Which Helps More?

Say a builder offers either a credit or a lower price. The two do different jobs.

A price cut lowers the base your 3.5% is figured on and shrinks the loan. A credit leaves the price alone and covers costs. Builders often prefer credits because they protect their advertised prices and neighborhood comparables. Ask for both options in writing, then compare them on cash to close and on the loan balance you will carry.

Lever Two: Finance the Upfront Mortgage Insurance

Financing the upfront mortgage insurance premium lowers cash to close, but it raises your loan balance. The upfront premium is 1.75% of the base loan, and across the programs Lendmire places with, it is normally financed into the loan.

HUD sets that figure in Mortgagee Letter 2023-05. One caution: the premium is either financed or paid in cash, not split. If you choose cash, it adds to what you bring.

This is a tradeoff, not a freebie. A bigger balance means a slightly bigger payment and more interest over time. The financed premium is added on top of the base loan, so it does not count against the 96.5% ceiling, but it does raise the final loan amount. Your loan officer can show both versions side by side on a Loan Estimate.

The annual mortgage insurance premium is a separate item. It runs between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. On a thirty-year loan above ninety percent LTV, it lasts for the life of the loan. At or below ninety percent, it ends after eleven years. It is paid monthly, so it does not hit cash to close beyond the escrow cushion.

Lever Three: Earnest Money and Builder Deposits

Money you have already paid reduces what you owe on closing day. Your earnest money and any deposits paid to the builder are credited on the Closing Disclosure.

Section L of the disclosure includes earnest money, the loan amount and seller credits. Cash to close is the Section K total less the Section L total. That is why a larger deposit at signing does not change your total cost. It just moves the payment earlier.

Two cautions:

• Deposits for upgrades or lot premiums should be traced into the final contract price. Ask the lender how each one will be treated.
• Deposit money has to be sourced like any other funds. Expect a request for bank statements.

Lever Four: Gift Funds and Assistance

Gift money can cover the minimum investment; builder money cannot. A qualifying donor, such as a family member, can give funds toward the 3.5%, with a gift letter and a paper trail showing the transfer.

Down payment assistance programs vary by state, county and city. Some are grants, some are second loans. Their terms differ widely, and a few carry rules about homebuyer education or income. Check any program against your lender’s guidelines before you count on it.

Watch for a trap here. HUD treats interested-party funds as off limits for the minimum investment. If a builder or its affiliate offers help that sounds like a gift, ask your loan officer to confirm the source before you rely on it.

Lever Five: Lender Credits (Read the Trade)

A lender credit lowers your closing costs, but you pay for it somewhere else. The CFPB notes that lender credits are typically given in exchange for a higher interest rate.

That makes them a different kind of tool from a builder credit. A builder credit is paid by an interested party and is capped. A lender credit comes out of the loan’s pricing, which shows up as a higher payment for as long as you keep the loan.

HUD treats the two differently too. Premium-pricing credits from a lender or third-party originator sit outside the 6% limit, as long as that lender is not the builder, agent or developer. The exclusion does not apply to a lender owned by or affiliated with the builder.

This one is a genuine judgment call. A lender credit can make sense if you expect to sell or refinance within a few years. If you plan to stay a long time, the extra monthly cost can outweigh the cash saved. Ask for loan estimates with and without the credit, and compare the long-run picture.

Where the Rules Bite on New Construction

New builds have extra moving parts. These are the ones that change cash to close.

Appraisal versus contract price. On a home that is not finished, the appraiser works from plans and specifications. If the appraised value comes in below the contract price, the loan is based on the lower figure. You can negotiate the price, bring more cash, or walk away under your contract’s terms. Read that clause before you sign.

Credits that exceed the limits. The excess is an inducement and reduces the value used for underwriting. That can shrink the maximum loan and increase your cash.

Builder-affiliated lender. If the builder pushes you toward its own lender, compare that offer with at least one outside quote. The premium-pricing exclusion above does not help you there.

Construction stage. HUD’s Mortgagee Letter 2020-36 defines three stages: proposed construction, under construction, and existing less than one year old. Required documents differ by stage. The same letter makes the builder’s Warranty of Completion (Form HUD-92544) a requirement for all new construction, which gives you a one-year builder warranty.

The appraisal is not an inspection. The HUD Handbook 4000.1 glossary says an FHA appraiser’s observation is limited to readily observable conditions. It is not as comprehensive as a licensed home inspector’s. Hire your own inspector, since a defect found now costs the builder, not you.

Occupancy. FHA financing here is for your primary residence. County loan limits apply and change each year, so confirm the limit for your county before you pick a floor plan.

When Each Dollar Comes Due

New builds spread costs over a longer timeline than a resale. A rough order:

1. At contract: earnest money and often a builder deposit.

2. During construction: design-center upgrades, option deposits and sometimes appraisal or inspection fees.

3. Before closing: homeowners insurance, a final walk-through and any lock extension if the build runs long.

4. At closing: the remaining minimum investment, closing costs, prepaids and escrows, less every credit and deposit.

The long gap between signing and closing is where surprises live. Appraisals and credit documents can expire, and if completion slips, you may have to refresh them. Ask your loan officer how long each document stays valid with the lender handling your file, and what a delay would cost.

Stacking the Levers: A Sample Walk-Through

Picture a buyer purchasing a new home at a 96.5% loan-to-value. Here is a sensible order of operations, described in percentages rather than dollars.

1. Start with the floor. The 3.5% minimum investment is yours or a donor’s. Nothing else touches it.

2. Add the builder credit. Negotiate up to the 6% ceiling, but only up to your real costs. If costs total less than 6%, ask for the smaller number so nothing is trimmed from the price.

3. Finance the upfront premium. That removes it from your cash needs at the cost of a larger balance.

4. Count deposits already paid. They reduce what remains.

5. Decide on a lender credit last. Only if you still need cash and you accept the higher payment.

What is left is your cash to close. Notice that the minimum investment is the part that never goes away. The other levers only shrink the costs on top of it.

Questions to Ask Before You Sign

• Is the credit written as “up to” a percentage, or a fixed amount?
• Does it cover closing costs, prepaids and buydowns?
• What happens to any unused credit?
• Which lender does the builder prefer, and is it affiliated with the builder?
• What if the appraisal comes in under the price?
• How long can the construction timeline run, and what does an extension cost?
• Which upgrades or deposits are paid outside closing?

Bring the answers to your loan officer. Lendmire’s FHA loan programs are arranged through wholesale lenders, and a broker can compare how different lenders treat these same items. Cash needs also affect how much of a debt load the file can carry. For that angle, see Lendmire’s piece How to Close a Texas FHA Cash-Out to Pay Off Debt on a High DTI.

Key Terms Defined

Cash to close: The total you bring on closing day after credits and money already paid.

Minimum required investment: The 3.5% of the lesser of price or appraised value that the borrower must contribute. Interested parties cannot fund it.

Interested party: A builder, seller, developer or real estate agent with a stake in the sale.

Inducement to purchase: Contributions above actual costs or above 6% of the price. They reduce the price used for underwriting.

Upfront mortgage insurance premium: A one-time FHA charge of 1.75% of the base loan, usually financed.

Lender credit: A rebate against closing costs, typically exchanged for a higher interest rate.

Prepaids: Costs paid ahead of time, such as the first year of insurance and early escrows.

If you are buying a home and want to see whether an FHA loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Every figure above is a program guideline, subject to lender guidelines and full file review, and none of it is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. CFPB Closing Disclosure Explainer

2. HUD FHA Q&A: Interested Party Contributions

3. HUD Mortgagee Letter 2023-05

4. HUD Mortgagee Letter 2020-36

5. HUD Handbook 4000.1 Glossary