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Build A House On Your Own Land With An FHA Mortgage

May 3, 2023

Build on your own lot. Construction loan basics

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.

Want More Information About One-Time Close Loans?

One-Time Close Loans are available for FHAVA and USDA Mortgages.  These loans also go by the following names: 1 X Close, Single-Close Loan or OTC Loan. This type of loan allows for you to finance the purchase of the land along with the construction of the home. You can also use land that you own free and clear or has an existing mortgage.

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 (one) licensed construction lender in your area, please send responses to the questions below. All information is treated confidentially.

OneTimeClose.com 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 allow for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). You CANNOT act as your own general contractor (Builder) / not available in all States.

In addition, this is a partial list of the following homes/building styles that are not allowed under these programs:  Kit Homes, Barndominiums, Log Cabin or Bamboo Homes, Shipping Container Homes, Dome Homes, Bermed Earth-Sheltered Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes, Tiny Homes, Carriage Houses, Accessory Dwelling Units and A-Framed Homes.

Your email to info@onetimeclose.com authorizes Onetimeclose.com to share your personal information with (one) mortgage construction lender licensed in your area to contact you. Your credit report will NOT be pulled due to sending this and we do not ask for Social Security numbers.

  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 veteran’s, 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 $1,000,000 and review higher loan amounts on a case by case basis.   If not an eligible veteran, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.

Or go to our site and Request Additional Information.

Bruce Reichstein - FHA News Author

By Bruce Reichstein

Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.

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