It's a great strategy for the undercapitalized home buyer that has the desire to improve and customize an existing home into a new. In fact, I wrote a blog about it recently that outlines alot of the perks.
The drawbacks as I see it involve the borrower having to pay FHA Mortgage Insurance. I try to avoid having my clients pay MI if at all possible. Also, the lag in time from closing to construction completion if Borrower doesn't have the ability to wait to move into the new home can also be a drawback. Most people, I find are willing to live with the inconvenience if they know they will get the home of the dreams in another 1-2 months afterwards.