FHA One-Time Close construction loans have different requirements for down payments and interest rate issues can be more complex; many borrowers are interested in this home loan but aren’t clear on the finer points.
Today we examine how down payment issues and interest rate rules apply to the FHA One-Time Close construction loan.
The FHA loan handbook, HUD 4000.1 describes the One-Time Close loan, also known as an FHA construction-to-permanent mortgage, as a loan that “…combines the features of a construction loan (a short-term interim loan for financing the cost of construction) and the traditional long- term permanent residential Mortgage with a single mortgage closing prior to the start of construction”.
FHA One-Time Close Construction Loan Down Payment Rules
HUD 4000.1 allows for some unique down payment sources that don’t apply for certain other types of home loans. According to page 445, for One-Time Close construction loans, “The Borrower may utilize any cash investment in the Acquisition Cost of the Property to satisfy the Minimum Required Investment (MRI).”
Furthermore, the lender is required to “document the cash investment was from an acceptable source of funds in accordance with TOTAL or manual underwriting requirements as applicable” and your lender will have to have supporting evidence that shows the cost of the purchase.
The borrower must be able to document when the land was bought, and whether there were any “borrower-paid extras” that were rendered “over and above the contract specifications and any out-of- pocket expenses not included in the builder’s price to build”.
The lender is required to do so in order to insure those funds come from an acceptable source, according to HUD 4000.1.
FHA One-Time Close Construction Loan Rules For Interest Rates
While typical FHA home loan interest rate guidelines apply, there is a section unique to this type of loan due to the circumstances of the loan. Traditionally, FHA loan interest rates are negotiated between the lender and the borrower. This is true of FHA One-Time Close mortgages too, but some borrowers don’t know that there is an Adjustable Rate option for the construction phase of the loan.
According to HUD 4000.1:
“During the construction period, the interest rate may be variable. The Mortgagee and the Borrower must enter into an agreement that:
-documents the range in which the interest rate may float during construction;
-documents the point of interest rate lock-in;
-specifies that the permanent Mortgage will not exceed a specific maximum interest rate;
-permits the Borrower to lock in at a lower rate, if available and they have not already locked in a rate.”
Your FHA lender will explain the interest rate lock-in requirements for that financial institution; state law and other factors may apply in addition to lender standards and FHA loan minimums.
We have done extensive research on FHA, VA and USDA One-Time Close mortgages and spoke directly to the licensed lenders for most states. These are qualified mortgage loan officers who work for lenders that know the product well.
Each company has supplied us the guidelines for their product. If you are interested in being contacted by one licensed lender in your area, please respond to the below questions to save time. All information is treated confidentially.
Your response to firstname.lastname@example.org authorizes us to share your personal information with a licensed mortgage lender in your area to contact you.Please note that the One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multifamily units (no duplexes, triplexes or fourplexes).
- Send your first and last name, e-mail address, and contact telephone number.
- Tell us the city and state of the proposed property.
- Tell us your credit score and /or the co-borrower’s credit score, (if you know it). 620 is the Minimum qualifying credit score for this product.
- Are you or your spouse (co-borrower) eligible Veterans? If either of you are eligible Veteran’s, the down payment is $0 up to the maximum VA lending limit for your county. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.