You may qualify for a Federal Housing Administration land loan if you plan to build a house on the property within a specific time frame. This loan is also known as the construction to permanent loan. The FHA, a division of the U.S. Department of Housing and Urban Development, doesn't actually provide money to individual loan applicants. It insures loans made by its approved lenders.
Tip
The maximum loan amount available from the FHA is $625,500 in the country's costliest metropolitan areas as of 2015. In most parts of the country with overall low housing costs, the maximum loan amount is $271,050.
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The Combined Loan
The construction to perm loan is a combined loan, including financing for both land acquisition and construction. It converts to a traditional FHA mortgage when the home is completed. This loan is also available for buyers who already have a lot and require only the construction/mortgage aspect of the financing. FHA guidelines require either the conventional 3.5 percent down payment or no down payment at all if the buyer already has the land. There is also the standard limit of 6 percent on seller concessions toward loan closing costs.
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Land Issues
How the FHA determines the value of land equity when it's used in lieu of a down payment depends on how long the borrower has owned the property.
- If the land has been owned for less than six months, you must provide a settlement document stating the cost.
- If you own the land outright, you must provide proof of ownership and that the property is free from liens.
- If the land was a gift, or if you have owned it for more than six months, its current value is considered rather than its cost.
General Guidelines
Under FHA regulations, the borrower cannot act as his own general contractor. Additional rules include:
- The borrower must have a contract with a builder.
- Construction upgrades are out-of-pocket expenses, not covered by the FHA loan.
- The construction period is limited to just over four months -- 130 days. If it goes over the time allowed, the builder is charged per diem, $75 per day as of 2014.
Warning
Your loan is ineligible for FHA mortgage insurance until the home undergoes and passes a final inspection by the appropriate municipal official or you receive a certificate of occupancy is issued -- whichever is later.