How Does FHA Size a Loan to Build on Land You Already Own?

Somewhere in a folder at home is the settlement paperwork from the day you bought your lot. You probably filed it away and haven't looked at it since. Near the top of the first page is a date, and on an FHA loan to build your home, that date changes how much your land is worth to the lender.

On a home built on your lot, FHA lends a set share of the lower of the finished home's appraisal and your cost to build, land included. Your FHA case number is the number FHA assigns your loan file when your lender opens it. Land owned more than six months on the day the case number is assigned counts at appraised value; otherwise, at the lower of cost and appraisal.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, NMLS #483943, through C2 Financial Corporation, and licensed in fifteen states. I wrote this for you if you own a lot and want to build your home on it with an FHA loan. Every rule below comes from section II.A.8.k of HUD's Single Family Housing Policy Handbook 4000.1, titled "Building on Own Land" and revised 06/17/2019.

What does FHA mean by building on your own land?

The handbook defines Building on Own Land as the permanent financing of a newly constructed home on land you own. In plain terms, it is the long-term mortgage on the home you build on your lot, and it can pay off any construction loans that funded the build.

FHA has a close cousin to it in section II.A.8.j of the same handbook, called Construction to Permanent. That program combines the construction loan and the long-term mortgage into a single closing before construction starts. It works whether you already own the land or are buying it at that closing. If the one-closing route is the one you are weighing, how a construction-to-permanent mortgage works walks through the draws and the conversion. This article stays with the lot you already own and the arithmetic that sizes your permanent loan.

Builder and general contractor requirements for FHA Building on Own Land

You need a contract with a builder, and the builder has to be a licensed general contractor. You can act as your own general contractor only if you hold a general contractor's license yourself.

If your plan has been to manage the subcontractors yourself without that license, a licensed builder belongs on the contract before the bids are final.

How does FHA calculate the maximum loan when you build on your own land?

Your lender starts with two numbers and uses the lower one. The first is the appraised value of the finished home. The second is your documented acquisition cost, which is the handbook's name for everything it took to put the home on your lot. The maximum loan is the FHA purchase loan-to-value percentage of whichever number is lower. Loan-to-value is the share of the home's value that the loan is allowed to cover.

I am leaving the percentage itself out of this article on purpose, because FHA sets it and it can change. Your lender applies the current figure, and the FHA loan guide explains how the program works overall.

The documented acquisition cost adds up four things:

1. The builder's price to build, or the sum of all the subcontractor bids and materials.
2. Options and construction costs you pay for yourself that are not included in the builder's price.
3. Interest and other costs of a construction loan you took out to fund the build, if you had one.
4. The land, counted one of two ways depending on how long you have owned it. That is the next section.

For a manufactured home, the handbook says the builder's price includes the cost of the unit, the cost to move it from the dealer's lot to your land, and all of the installation work on site.

FHA's six-month rule for land you already own

The handbook measures your ownership on one specific day: the day the FHA case number is assigned to your loan file. Your lender requests that case number from FHA once your file is under way, so the date is something the two of you can see coming.

How you came to own the land	How the land is counted
Owned six months or less at case number assignment	The lower of what you paid for it and its appraised value
Owned more than six months at case number assignment	Its appraised value
Received as an acceptable gift	Its appraised value

In the first six months, a higher appraisal does not raise the land above what you paid for it. After six months, the appraisal is the number that counts, whether it comes in above or below your purchase price.

If your lot has gone up in value since you bought it, crossing the six-month line can raise your acquisition cost by the full amount of that increase. If the lot is worth less than you paid, the line makes no difference, because both rows of the table then point to the appraisal.

The appraisal of the finished home still caps everything. Your loan is sized from the lower of that appraisal and your acquisition cost, so a bigger land figure only raises the loan when the acquisition cost was the lower of the two.

Your lender documents the date you bought the land with the Closing Disclosure or a similar legal document from that purchase. If your six-month date is close, it is worth asking your lender how the timing of the case number request lines up with it.

Land equity and the FHA down payment

FHA requires an investment from you on every loan, and the handbook calls it the Minimum Required Investment. On a Building on Own Land loan, you can meet it with any cash you put into the acquisition cost, or with the equity in your land.

So the lot you already own can do the work that a cash down payment does on an ordinary purchase. If you do put cash in, your lender documents that it came from an acceptable source under FHA's normal underwriting requirements.

A gift of land on an FHA loan

Land you received as an acceptable gift counts at its appraised value, however recently you received it. Two more checks come with that. Your lender collects the standard FHA gift documentation, and it verifies that the person who gave you the land was not a prohibited source.

FHA's asset rules, in section II.A.4.d of the same handbook, spell out both pieces. For a gift of land, your lender gets proof that the donor owned the land and evidence that title was transferred to you. The gift letter is signed and dated by the donor and by you. It gives the donor's name, address, telephone number and relationship to you, the amount of the gift, and a statement that no repayment is required.

That same section says your minimum investment cannot come from the seller, from anyone who benefits financially from the transaction, or from anyone reimbursed by one of them. So a lot deeded to you by a parent can count as a gift, while a lot from the company building your home cannot count toward your minimum investment, because the builder benefits financially from the transaction.

If family is helping with cash instead of land, how gift funds for a down payment are documented covers that side.

Can you take cash out of your land equity when you build?

The handbook does not allow cash back from the additional equity in the property. It does let you replenish your own money in two cases. The first is extras you paid for that go over and above the contract specifications. The second is out-of-pocket expenses that are not included in the builder's price.

Say you paid out of savings for an upgrade that your building contract did not include. The loan can put that money back in your account, as long as your lender has an itemization listing each extra or expense and the cost of each one. Your lender also needs evidence that the money you paid for those options came from an acceptable source.

The documents your lender will ask for

When you're ready, please provide the Closing Disclosure or similar legal document from the purchase of your land, all pages, please. It shows the date you bought the lot and what you paid for it, and that date decides which row of the six-month table applies to you.

The rest of the file usually includes these:

• Your contract with your licensed builder, which documents the price to build.
• Your construction loan statements, every page from the first month on, if you had a construction loan, so its interest and costs can be counted in the acquisition cost.
• An itemization of options and expenses you paid yourself, with the cost of each item and evidence of where the money came from.
• The gift letter and title transfer, if the land was a gift.
• The New Construction paperwork. The handbook also requires your lender to follow FHA's New Construction rules. Section II.A.8.i lists form HUD-92541, the Builder's Certification of Plans, Specifications, and Site, and form HUD-92544, the Warranty of Completion of Construction, along with the required inspections.

If your new home will be on a private well, FHA's well requirements for new construction covers the depth, distance and flow rules that come with it.

Mistakes I would plan around

Assuming the lot counts at today's value no matter when you bought it. Inside six months at case number assignment, it counts at the lower of what you paid and what it appraises for.

Planning to act as your own general contractor without a license. FHA's rule calls for a licensed general contractor on the contract, and that is you only if you hold the license.

Losing track of the construction loan costs. Interest and other costs of a construction loan count toward the acquisition cost, so it helps to keep those statements from the first month.

Paying for upgrades without a paper trail. Getting that money back depends on an itemization and on showing where the money came from, so it is much easier to keep each receipt as you go.

An illustration, so the arithmetic is clear

The numbers below are made up to show the mechanism.

A client paid $60,000 in cash for a lot, and the lot now appraises at $90,000. The licensed builder's price is $300,000. The construction loan's interest and costs come to $12,000, and there are no extras outside the contract. The finished home appraises at $410,000.

	Case number at month five	Case number at month seven
Builder's price	$300,000	$300,000
Construction loan interest and costs	$12,000	$12,000
Land	$60,000 (lower of cost and appraisal)	$90,000 (appraised value)
Documented acquisition cost	$372,000	$402,000
Appraised value of the finished home	$410,000	$410,000
Lower of the two, used to size the loan	$372,000	$402,000

The FHA purchase loan-to-value percentage is applied to the last line. It is the same lot, the same builder and the same appraisal, and the starting figure is $30,000 higher in the second column because of the date the case number was assigned. In both columns, the land equity can count toward the minimum investment.

Now suppose the finished home had appraised at $380,000 instead. The second column would be capped at $380,000, and the later case number would have added $8,000 to the starting figure rather than $30,000.

Your next step

FHA loans are priced in Rate & Best Fit on the homepage, and you can see FHA pricing for a loan amount and down payment like yours without a credit pull or an account. Once you see the options, you can choose a rate option that works best for you, and that selection can change as the file comes together. If you own a lot and would like help working out where your land falls on the six-month line before your file starts, you are welcome to call me.

How an appraisal works covers the appraiser's side of a new home. If your builder has a preferred lender, whether to use the builder's lender on new construction explains how to compare that offer.

Nothing here is a loan approval, a denial, or a commitment to lend.

Common questions

Can I use an FHA loan to build on land I already own?

Yes. FHA handbook section II.A.8.k, "Building on Own Land," covers the permanent financing of a newly built home on land you own, and that loan can pay off any construction loans used for the build. You need a contract with a builder who is a licensed general contractor. You can be your own general contractor only if you hold that license yourself.

Does FHA use the appraised value of my land or what I paid for it?

It depends on how long you have owned the land when the FHA case number is assigned. At six months or less, the land counts at the lower of what you paid and its appraised value. At more than six months, or if the land was an acceptable gift, it counts at its appraised value. FHA's construction-to-permanent section, II.A.8.j, uses the same land rule.

When does FHA measure the six months of land ownership?

On the day the FHA case number is assigned to your loan. Your lender documents the date you bought the land with the Closing Disclosure or a similar legal document from that purchase, and compares it with the case number assignment date.

Can my land count as my down payment on an FHA construction loan?

Yes. On an FHA Building on Own Land loan, your equity in the land can satisfy FHA's Minimum Required Investment, which is the investment FHA requires from you on every loan. Any cash you put into the cost of the home can count too, and your lender documents that cash as coming from an acceptable source.

Can I get cash back from my land equity on an FHA Building on Own Land loan?

No. FHA handbook section II.A.8.k does not allow cash back from the additional equity in the property. You can be repaid for your own money spent on extras beyond the contract specifications, and for out-of-pocket expenses not included in the builder's price. Your lender needs an itemization of each extra and expense with its cost.