Can New Construction Closing Costs Be Financed on an FHA Loan?

The Quick Read: Mostly no, with two narrow exceptions. FHA does not let you add general closing costs to the loan as their own line. The upfront mortgage insurance premium is the one closing charge you can finance. On a construction-to-permanent loan, the acquisition cost can also include certain construction-related items a plain purchase would not count. Most other closing costs get covered by your cash or by a builder credit, within limits.

What Counts as a Closing Cost on a New Build?

Closing costs are the fees you pay to finish the loan and transfer the home. They are separate from the price and separate from your down payment. Think of three buckets: loan and title fees, prepaid items like the first insurance premium and escrow deposits, and government charges.

A new build adds a few items. Many builders charge administrative fees, set up HOA accounts, or attach lot premiums. Closing costs on a new home are often similar to a resale and driven mostly by the loan, title, and government fees. Builder-specific items sit on top.

Here is how those pieces behave under FHA.

Why Can’t You Just Roll Closing Costs Into the Loan?

FHA sets your loan amount with a formula, not a choice. The loan is a percentage of the lesser of the appraised value or the documented acquisition cost. HUD’s Mortgagee Letter 2019-08 restates this for construction-to-permanent loans. There is no extra room above that number for fees.

Across the wholesale programs Lendmire places FHA files with, the ceiling is 96.5% financing, with a 3.5% minimum investment from you. That investment applies at a decision score of 580 or higher. Subject to lender guidelines and full file review, those figures set the outer edge of the loan.

Closing costs, prepaids, and points do not count toward your minimum investment. Your 3.5% has to come from your own acceptable funds. Closing costs are a second pile of cash, not a substitute for the first.

Picture a buyer under contract on a new home at a price that appraises right on target. The loan tops out at 96.5% of that figure. Nothing in the formula adds the fees on top. If you want fewer dollars out of pocket, your options are the exceptions below and credits.

Exception One: The Upfront Mortgage Insurance Premium

This is the one you can finance. FHA charges an upfront mortgage insurance premium of 1.75% of the base loan amount. HUD’s Mortgagee Letter 2023-05 sets it as a percentage of the base loan for all mortgages, with narrow exceptions.

Most borrowers add it to the loan. That lowers the cash you bring to closing. The tradeoff is real: a bigger balance means interest accrues on it, and the payment is higher than it would be otherwise.

There is also an annual premium. Across the programs we work with, it runs between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. On a thirty-year loan above 90% LTV, it lasts for the full term. At or below 90%, it ends after eleven years. These are program mechanics, not a price quote. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Exception Two: Construction-to-Permanent Loans

A construction-to-permanent loan, often called a one-time close, is a single loan that covers the build and then converts to your permanent mortgage. You close once, before construction starts. You own the land or are buying it, and you contract with a licensed general contractor.

Here the acquisition cost is defined more broadly. HUD’s construction-to-permanent rule lists the builder’s price, borrower-paid options, construction costs outside the builder’s price, and closing costs on any interim land financing. Because the loan is a percentage of that acquisition cost (or appraised value, if lower), some costs that would not count on a plain purchase can sit inside the loan base.

Land equity can help too. On this type of loan, cash or equity in land you already own can satisfy your minimum investment. The source of funds still has to be documented.

Be careful with the phrase “closing costs financed.” That is not the same as a blank check. The loan still cannot exceed the percentage of the lesser of value or acquisition cost. Appraised value is the real ceiling.

Which Path Are You On?

The answer changes with how you are buying.

HUD defines “proposed construction” as a property where no concrete or permanent material has been placed. HUD’s Mortgagee Letter 2020-36 says digging footings does not count. That label drives which documents the lender must collect, such as the building permit and certificate of occupancy, or required inspections.

One more wrinkle: FHA construction financing is primary-residence financing. If the home is a second home or a rental, occupancy decides the leverage, and that is a different conversation.

Builder Credits: The Main Route

Most buyers who walk in with less cash use a builder credit. Under FHA, a builder is an “interested party,” along with sellers, agents, and developers. HUD’s glossary defines the term.

Across our programs, interested parties can contribute up to 6% of the price toward your costs. That can include origination fees, other closing costs, and prepaid items. The 6% also includes the upfront premium if the builder pays it.

Three limits matter.

• Actual costs only. A credit can cover real costs. Any amount above actual costs is an “inducement to purchase.”
• The 6% cap. Contributions above it are also inducements.
• Not your down payment. Interested-party funds cannot count toward your minimum investment.

HUD’s FHA Q&A says an inducement reduces the value used to set your loan amount, dollar for dollar. So an oversized credit can shrink the loan. It does not reduce what you owe at the table.

The line gets blurred often. A builder credit lowers the cash you need at closing. It is not financing. Your loan balance stays the same unless the credit trips the inducement rule.

Sellers’ customary agent commissions are generally not counted as interested-party contributions. The same Q&A also addresses premium-pricing credits, which have their own treatment depending on who the originator is.

Are Builder Credits Really Free?

Not usually. A credit often comes with strings. Builders commonly tie larger incentives to using a preferred lender and title company. The cost can also be built into the home price or the loan terms.

So compare. Ask for Loan Estimates from your builder’s lender and at least one other source for the same loan type and amount. Then weigh the credit against the full terms, not just the headline. A smaller credit with better terms elsewhere can beat a bigger credit with worse ones.

Lendmire is a mortgage broker licensed for consumer lending in 16 states, and it arranges FHA loans through wholesale lenders. That gives a buyer a way to line up a comparison next to the builder’s offer. Details on the FHA loan programs are a useful starting point.

What Happens With a Low Appraisal or a Long Build?

On proposed construction, and on homes less than 90% complete, the appraisal is done “subject to completion per plans and specifications,” per HUD’s appraisal data guide. The appraiser values the finished home.

If that value comes in under the contract price, the loan base shrinks to match. You would need to cover the gap with cash, renegotiate, or walk away depending on your contract. Credits stacked on a low appraisal compound the problem, because inducements reduce the base too.

Appraisal validity matters on longer timelines. HUD’s Mortgagee Letter 2022-11 sets an initial validity of 180 days, with an update valid for one year from the initial effective date. Ask your loan officer how that plays out on your specific project, since builds can run long.

A Practical Cash-to-Close Walkthrough

Break the cash you need into pieces:

1. Minimum investment. 3.5% of the lesser of price or appraised value. Your own funds only.

2. Closing costs. Loan, title, and government fees. Paid in cash or covered by a credit within limits.

3. Prepaids and escrows. Same treatment as closing costs.

4. Upfront premium. Financed, or paid in cash. Financing it adds to the balance.

5. Earnest money and deposits. These count toward your funds if they are your own and documented.

Credits come off items two and three, never item one. That is why a buyer with a thin cash cushion still needs the minimum investment saved, even with a generous builder.

The decision usually reduces to this. Finance the upfront premium if you want to preserve cash, and accept the larger balance. Ask for a credit if the builder offers one with fair terms. Pay cash for fees if you want a smaller loan and no strings. Many buyers mix all three.

Disclosures on a Construction Loan

You will get a Loan Estimate and a Closing Disclosure, as with any consumer mortgage. The CFPB’s TRID FAQs say a construction-to-permanent loan can be disclosed on one combined set of forms or on separate ones. They also allow revised estimates in some new-construction cases when settlement is expected more than 60 days after the Loan Estimate. Ask your loan officer which format applies to your file.

Mistakes to Avoid

• Assuming all closing costs roll in. Only the upfront premium can be financed into the loan. Everything else needs cash or a credit.
• Counting a builder credit toward your down payment. It does not count.
• Ignoring the 6% limit. Overshooting it can cut your loan amount.
• Skipping the comparison. A preferred-lender incentive deserves a second Loan Estimate.
• Forgetting the appraisal risk. The finished-home value, not the contract price, sets the loan.

Key Terms Defined

Minimum required investment: The part of the purchase you must fund yourself, at least 3.5% of the adjusted value, from your own acceptable funds.

Upfront mortgage insurance premium: A one-time FHA charge of 1.75% of the base loan that can be financed into the loan.

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

Inducement to purchase: A contribution above actual costs or above the 6% limit, which reduces the value used to set your loan.

Construction-to-permanent loan: One loan, closed once, that funds the build and then becomes your long-term mortgage.

Prepaids: Costs paid ahead of time, like the first insurance premium and escrow deposits.

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. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

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

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Mortgagee Letter 2019-08 (Construction to Permanent)

2. HUD Mortgagee Letter 2023-05 (Appendix 1.0, MIP)

3. HUD Mortgagee Letter 2020-36

4. HUD’s glossary

5. HUD FHA Q&A: seller or interested-party costs

6. HUD’s appraisal data guide

7. HUD’s Mortgagee Letter 2022-11

8. CFPB TRID FAQs