September 21, 2021

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Unique FHA Construction Loan Rules

Home Loans For Building On Your Own Land

It can be more exciting to build a home from the ground up to your specifications than buying existing construction. Some borrowers prefer to have more say in the design of their homes and that’s where an FHA One-Time Close construction loan comes in.

If you want to build a home on your own lot using a construction-to-permanent loan, also known as a One-Time Close mortgage (AKA the “single-close” construction loan), you should know that certain home loan rules are different for construction loans than for existing construction mortgages.

There are some aspects of construction loans the borrower applying for an existing construction home loan won’t have to deal with, and there are specific rules for unique issues associated with building a home.

For example, when applying for an FHA One-Time Close mortgage, the purchase or ownership of unimproved land is an issue. Are you planning to build on your own lot? Or do you need to purchase one?

FHA loan rules in HUD 4000.1 state, “The Borrower must either be purchasing the land at the closing of the construction loan, or already own the land.” Some want to know if they can apply for an FHA loan to buy the land and return at a later time to apply for a construction loan.

FHA loan rules include prohibitions on approving FHA loans for unimproved land with no specific goal to begin constructing a home. In other words, when you apply for an FHA OTC loan, you’ll need to buy the land at the same time as you apply for the construction loan if you don’t already own an appropriate lot.

At the right stage in the mortgage loan application process, your lender will need to calculate the adjusted value of the home for purposes of establishing the loan amount. In such cases, the lender is required to use either the appraised value of the property or “the documented Acquisition Cost to determine the Adjusted Value”. 

HUD 4000.1 states that in such cases, “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.”

The “documented acquisition cost of the property” calculation includes:

  • the builder’s price (includes cost of land if being purchased), or the sum of all subcontractor bids and materials (if land is already owned by the Borrower);
  • Borrower-paid options and construction costs not included in the builder’s price to build;
  • Closing costs associated with any interim financing of the land, and either of the following–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 the 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.

Down payments for FHA OTC loans are also unique compared to other home loan products. There are options FHA OTC borrowers have that those buying existing construction do not have. HUD 4000.1 advises that OTC borrowers, “may utilize any cash investment in the Acquisition Cost of the Property or land equity to satisfy the Minimum Required Investment”.

The lender, in such cases, is required to fully document that the cash investment was properly sourced and meets FHA loan requirements for down payments. 

Ask your participating lender what documentation will be needed in such cases and be sure to follow the instructions for documenting your down payment funds to the letter.

Want More Information About One-Time Close Loans?

One-Time Close Loans are available for FHA, VA and USDA Mortgages.  These loans also go by the following names: 1 X Close, Single-Close Loan or OTC Loan.

We have done extensive research on the FHA (Federal Housing Administration), the VA (Department of Veterans Affairs) and the USDA (United States Department of Agriculture) One-Time Close Construction loan programs.

We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products.

We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially. provides information and connects consumers to qualified One-Time Close lenders in an effort to raise awareness about this loan product and to help consumers receive higher quality service.

We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.

Please note that investor guidelines for the FHA, VA and USDA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs:  Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.

Your email to authorizes to share your personal information with a mortgage lender licensed in your area to contact you.

  1. Send your first and last name, e-mail address, and contact telephone number.
  2. Tell us the city and state of the proposed property.
  3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good – (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
  4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $750,000 and review higher loan amounts on a case by case basis.  If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.

About was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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