Some house hunters decide to stop looking at existing construction homes and start thinking about building a house for themselves from the ground up. Other people know from the start of their homeownership journey that they want to build and not buy an existing home.
FHA home loan rules in HUD 4000.1 include guidelines for lenders who want to help these borrowers.
The section of the rulebook titled “Building on Own Land” tells lenders how to proceed with a construction loan including maximum loan amounts, who can act as the general contractor on the project, and more.
Are you interested in having a house built for you on your own lot? Not interested in having to choose from existing construction housing? Building on your own land may be the right move (and home loan option) for you.
The HUD Definition
HUD 4000.1, page 457 is where the rules and guidelines for building on your own land are found, starting with the FHA definition of the term:
“Building on Own Land refers to the permanent financing of a newly constructed dwelling on land owned by the Borrower” and such loans are permitted to include “the extinguishing of any construction loans.”
Loan Options May Vary
Depending on your lender, some options for construction loans may or may not be available.
HUD 4000.1 has a set of instructions to the lender under the Building On Your Own Land heading; Eligibility For The Loan, which says the FHA technically permits people to build their own homes if they meet FHA requirements.
“The Borrower must have contracted with a builder to construct the dwelling. The builder must be a licensed general contractor.”
No problems there, fairly straightforward. But the next line in the rulebook states, “The Borrower may act as the general contractor, only if the Borrower is also a licensed general contractor.”
Many lenders don’t want to issue loans when the borrower plans on being their own general contractor. You may find it harder to locate lenders willing to do this. It’s best to plan on hiring outside help unless you are told otherwise by a loan officer.
The Maximum Mortgage
When you want to build on your own land, the lender is required to use “the lesser of the appraised value or the documented Acquisition Cost to determine the Adjusted Value”.
The rules add that for these loans, the maximum mortgage amount is calculated “using the appropriate purchase Loan-to-Value (LTV) percentage of the lesser of the appraised value or the documented Acquisition Cost.”
What is the documented Acquisition Cost of the Property? It includes the following as detailed in HUD 4000.1:
- Builder’s price OR;
- A total of all subcontractor bids and materials;
- Borrower-paid options and construction costs not included in the builder’s price to build;
- Interest and other costs associated with a construction loan obtained by the Borrower to fund construction, if applicable.
The following also applies in an either/or context documented in the acquisition cost of the property;
- The lesser of the cost of the land, or appraised value of the land, if the land is owned six months or less at case number assignment OR;
- Appraised value of the land if the land has been owned for greater than six months at case number assignment or was received as an acceptable gift.
Learn More About FHA/ VA / USDA One-Time Close / Single-Close Mortgages
We have done extensive research on One-Time Close / Single-Close mortgage loans and spoke directly to the licensed lenders for most states. These are qualified mortgage loan officers who work for lenders that know the product well.
Each company has supplied the guidelines for their product. If you are interested in being contacted by one licensed lender in your area, please respond to the below questions to save time. All information is treated confidentially.
Your response to firstname.lastname@example.org authorizes us to share your personal information with a licensed mortgage lender in your area to contact you.
Please note that the One-Time Close / Single-close Construction Program only allows for single-family dwellings (1 unit) – and NOT for multifamily units (no duplexes, triplexes or fourplexes).
- Send your first and last name, e-mail address, and contact telephone number to email@example.com
- Tell us the city and state of the proposed property.
- Tell us your credit score and/or the Co-borrower’s credit score, if known. 620 is the minimum qualifying credit score for this product.
- Are you or your spouse (Co-borrower) eligible veterans? If so, the down payment is $0 up to the maximum VA lending limit for your county. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.