Can You Use an FHA Loan for New Construction?

The Quick Read: Yes. FHA insures mortgages on newly built homes in two ways: a standard purchase of a home from a builder (proposed, under construction, or finished less than a year ago and never lived in), and a one-close construction-to-permanent loan for building on land you own or are buying. Either way, the home must be your primary residence, and the file still has to meet lender guidelines and full review. Nothing here is a commitment to lend.

Which Path Are You On?

The right FHA product depends on where the home is in its life. Most buyers asking this question fall into one of four situations, and the answer changes for each.

Many people hear “new construction” and assume a custom build. They’re often looking at a tract or spec home from a production builder, and that is a plain purchase loan with extra paperwork. The construction loan only enters when nothing is built yet and you need money released in stages.

Two programs get confused with this one. FHA’s 203(k) is a rehab program, not a new-build product. FHA Section 221(d)(4) finances multifamily rental projects of five or more units and isn’t a consumer loan at all.

How Does FHA Define “New Construction”?

FHA sorts new homes into three stages, and each stage changes what the builder has to supply. Per HUD’s Handbook 4000.1 glossary, the stages are:

• Proposed construction: no concrete or permanent material has been placed. Digging footings doesn’t count.
• Under construction: from the first permanent material until the home is 100% complete without a Certificate of Occupancy or equivalent.
• Existing, less than one year: 100% complete, finished less than a year ago, and never occupied.

That last point trips people up. A home under a year old that someone has already lived in is treated as existing property, not new construction, according to Mortgagee Letter 2020-36. The same letter lists the eligible new-construction property types: site-built homes of one to four units and condominium units in approved projects.

Buying From a Builder With a Standard FHA Loan

If the home is proposed, under construction, or newly finished, the loan works like any FHA purchase. Across the wholesale programs Lendmire places FHA files with, financing reaches 96.5% of value with a 3.5% minimum investment at a decision score of 580 or higher. The home must be a one-to-four-unit principal residence. Seller or interested-party contributions can run up to 6% of the price, which matters when a builder offers closing help.

The extra work sits on the builder’s side. The appraiser, an FHA Roster Appraiser, sets the value. The builder signs a one-year Warranty of Completion on Form HUD-92544, covering defects in equipment, material, or workmanship. The lender also needs proof the home is finished. Under ML 2020-36, that can be a Certificate of Occupancy, a final inspection by the local authority or an ICC-certified inspector, or, where neither exists, a final inspection by a disinterested registered architect or structural engineer.

One rule change is worth knowing. HUD dropped the old requirement for a 10-year protection plan in Mortgagee Letter 2019-05, saying inspections plus the Warranty of Completion do the job without the added cost. If a salesperson says a 10-year warranty is required, that’s out of date.

New-construction appraisals now also need photographs, per Mortgagee Letter 2025-18. Flood zones add their own rules: in a Special Flood Hazard Area, the finished grade must sit at or above the base flood elevation.

How the Construction-to-Permanent Loan Works

The construction-to-permanent (CP) loan combines construction financing and the long-term mortgage under one closing, held before construction starts. Mortgagee Letter 2019-08 sets the framework. In practice the sequence looks like this:

1. Get preapproved first. Do it before buying land or paying for plans. That tells you what the file supports.

2. Choose a lender that offers construction financing. Not every one does, and Lendmire’s role is to arrange these loans through wholesale lenders in the 16 states where it does consumer lending.

3. Sign with a licensed general contractor. The borrower must contract with a builder who holds that license.

4. Close once. You either buy the land at that closing or already own it.

5. Build, then convert. The loan moves to the permanent mortgage when the home is complete.

You can act as your own builder only if you are a licensed general contractor. Weekend do-it-yourself building doesn’t qualify.

How the Loan Amount Is Set

The lender uses the lesser of the appraised value or your documented acquisition cost, then applies the standard purchase LTV to that figure. The lesser-of rule is the main budget trap. If costs run past the appraised value, or you add options the appraisal doesn’t recognize, the gap comes out of your pocket.

Building on land you already own follows a related path. Land owned six months or less is valued at the lesser of cost or appraised value. Land owned longer is valued at appraisal, and your land equity can count toward your minimum investment. HUD’s Handbook has a separate section for it, so ask your lender how it applies to your lot.

What FHA Requires of You

Mortgage insurance applies on new construction like any FHA loan. The upfront premium is 1.75% of the base loan, usually financed. The annual premium 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 the full term; at or below 90% it ends after eleven years.

For debt ratios, the base pair is 31/43 (housing to total income) with no compensating factors. Documented factors can stretch that to 40/50 at the top tier, and the automated finding governs most files. A non-occupant co-borrower is allowed.

County loan limits apply, and they change every year. Check your county’s limit before you fall for a floor plan. HUD publishes them on its FHA lender mortgage limits page.

All of this is subject to lender guidelines and full file review.

Questions to Ask Before You Sign a Builder Contract

This is where FHA new-construction deals most often stall. Not every builder works with FHA, because the paperwork and inspections add steps. Ask before you fall for a lot:

• Have you built FHA-financed homes before?
• Will you sign the Warranty of Completion and the plans-and-specifications certification?
• How do you handle a completion inspection if the local office won’t do a final?
• What happens to my contract if the appraisal comes in below the price?
• Will you contribute toward closing costs, within the 6% limit?

Ask your lender a matching set. Does it handle construction-to-permanent loans? Who orders the appraisal? How does it treat a change order?

What Can Go Wrong

• Appraisal gap. Value comes in under cost, and the difference is yours to cover.
• Delays. Weather, permits, and supply problems push completion back. Build a buffer with your builder.
• Change orders. Upgrades you add mid-build raise cost without raising appraised value.
• Inspection snags. A missing Certificate of Occupancy or a failed final inspection holds up the file.
• Occupied-home surprise. A “new” home someone has already lived in is existing property, and the new-construction rules fall away.

Honest take: for a first-time buyer with modest savings, a finished or nearly finished builder home is usually the lower-friction route. A ground-up build can make sense if you own the land or want a specific design, though it asks for more cash cushion and patience.

Alternatives, and When FHA Is the Wrong Tool

FHA suits buyers who want low minimum investment and flexible credit. If you have strong credit and more cash, a conventional construction-to-permanent loan may carry different mortgage insurance costs, and some lenders set a higher credit floor for it. If you’re a veteran, VA financing is another option to compare. If the home won’t be your primary residence, FHA isn’t available; occupancy decides leverage.

For more on building with other financing, see Lendmire’s article Can You Use an Asset-Based Mortgage on New Construction?. To compare the mainstream route directly, review Lendmire’s FHA loan programs.

Key Terms Defined

Construction-to-permanent (CP) loan: a single loan that funds construction and then becomes your long-term mortgage after one closing.

Acquisition cost: the documented cost of the land, builder price, and approved extras, used to set the loan amount.

Adjusted value: the lesser of appraised value or acquisition cost, to which the LTV is applied.

Certificate of Occupancy: the local sign-off that a home is complete and fit to live in.

Warranty of Completion: the builder’s one-year promise that the home meets HUD standards and is free of defects in material or workmanship.

Draw: a staged release of construction funds as work is finished.

If You’re Ready to Compare Options

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.

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

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Handbook 4000.1 Glossary

2. HUD Mortgagee Letter 2020-36

3. HUD Form HUD-92544

4. HUD Mortgagee Letter 2019-05

5. Mortgagee Letter 2025-18

6. HUD Mortgagee Letter 2019-08

7. FHA lender mortgage limits page