The answer will be different in both scenarios since FHA will be a purchase & Conventional will be a refi.  

On 5/14/18 - 

I spoke with Lisa Barrett @ FNMA & she said at time of deed transfer to builder or before the buyer & builder need to enter into a legally binding equity buyout agreement.  We would want the following in the file:

We would need proof of brrws ownership

How the equity was determined (land on appraisal for construction loan, land value for construction loan, separate appraisal, etc)

How the equity will be given to brrw (credit on contract as EMD, etc)

An example could be :

1. In the equity agreement builder indicates EMD of $XX for lot (still must be supported by the items above) – this would also be reflected in the contract but be backed up by the equity agreement.

Original question:
We will be doing perm only financing for a new construction. The borrower currently owns the lot free and clear and wants to use the equity for his down payment. The builder wants him to deed it to them while they are building. Will this affect his ability to use it? We are still not sure if end financing will be Conventional or FHA, it will depend on his income at that time.