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FHA Construction Loans

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FHA Construction Loans

Hi everyone,


It's getting close to the time when me and my husband will be looking into getting an FHA construction loan, but I have some questions as I'm getting mixed information online.


His parents are giving us land.

Can the equity of this land be used for the 3.5% down payment? If so, is there a mininum amount of time will be have to be in possession of the land for this to be possible? I read somewhere it's six months.


Can down payment assistance be used on an FHA construction loan? I've read mixed answers on this.


Credit Score

What is the minimum credit score we can have in order to secure this type of loan.

While the house is being built, if our credit improves, will the interest rate on the loan stay the same?

I have read that no mortgage payment is due until until construction is finished, but interest has to paid during construction. Is this correct?



I have heard that if you can pay 20% down, you do not have to pay PMI. Is this accurate?

If we do have to because we do not have 20%, can the home ever be refinanced with a regular mortgage loan in order to avoid this expense?



Finally, what is the best route as far as finding someone qualified in your state with these types of loans? I'm sure I can do some digging around on this on my own, but figured someone here might have some solid advice.


Thanks in advance! This is a great forum which has been truly instrumental in all matters of credit.


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Community Leader
Super Contributor

Re: FHA Construction Loans

Yup, when you are gifted the land you can use the equity in the property.  FHA doesn't specify any minimum amount of time, usually 6 months is needed (at least that is what the lender we do our FHA construction loan uses), but that is when you have purchased a lot for a specific price and want to use the value of the lot up & above the price you paid for it... when you are gifted land the equity in it can be used immediately.


Down payment assistance can also be used in conjunction with it, but it's up to the down payment assistance provider (usually the city/state) to determine if it's eligible for construction loans... it may only be for new or existing homes.


Usually the credit score requirement is the same as the lenders normal FHA loan program.  Most being anywhere from 600-640.


The interest rate is locked in at closing, before construction begins... so any change in your credit score (for better or worse) after that point won't impact your loan terms.


During the course of construction, there is either an interest reserve built in to the loan amount you are qualifying for OR interest only payments have to be made based on the total amount of the construction loan that has been extended at end of each month when the payment is calculated.


Current FHA mortgage insurance guidelines can be found at  After closing, if there is 20% equity, then it's possible you can refinance into conventional and not have to pay PMI.

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