December 1, 2020

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FHA One-Time Close Loan Rules: Buying Land To Build On

Build On Your Own Lot

You can build a home on your own lot, even as a first-time home buyer. Thanks to the FHA single-family loan program, which includes a construction loan option, you can build a home instead of buying an existing construction house AND take advantage of low FHA loan down payment requirements.

FHA loan rules require only a 3.5% down payment even for construction loans, making the option to build instead of buy within reach of many who are just now exploring their options for becoming a home owner.

But when considering a construction loan it’s good to remember that you don’t have to own land already–not all construction loan borrowers own their own property and need to purchase the lot as part of the loan.

Building Your Home With A Construction Loan

The borrower is required to have a contact with a builder for the construction phase of the mortgage and your builder must be a licensed general contractor. This is the guidance of the FHA, and is a requirement of loan approval.

Purchasing Land For The Loan

FHA loan rules require the borrower to either already own the land to be built upon, OR the land may be purchased at the closing of the construction loan according to HUD 4000.1. You can’t close the loan without proof of ownership of the land, one way or the other. Why?

FHA loan rules say at closing time the borrower must have documentation of land ownership or acquisition of the land. HUD 4000.1 states, “A payoff statement and evidence of the actual payoff if mortgage proceeds are used to purchase or pay off debt on the land.” 

Valuation of the Land For Calculating the Loan Amount

The lender must calculate the adjusted value of the home in order to arrive at the final loan amount. FHA loan rules require closing costs associated with any interim financing of the land to be included in that calculation, as well as either:

  • The lesser of the cost of the land, or appraised value of the land, if the land is owned six months or less at case number assignment OR;
  • The appraised value of the land if the land has been owned for greater than six months at case number assignment, or was received as an acceptable gift.

When FHA loan money is used to purchase the land, once the cash has been disbursed for that purchase, the remainder of the mortgage funds go into an escrow account. This is the account that may be used during the construction phase of the loan.

Authorization Required

The lender is required to get the borrower’s written authorization for each payout during the construction phase of the loan, and loan funds can only be used for approved purposes. The borrower cannot draw from the escrow account for purposes other than paying for expenses directly related to the loan.

Once the construction phase is complete, the escrow account established before the purchase of the land must be dealt with according to FHA loan rules. The escrow account must become “fully extinguished, and any remaining funds must be applied to the outstanding principal balance of the permanent Mortgage”.

Want More Information About One-Time Close Loans?

One-Time Close Loans are available for FHA, VA and USDA Mortgages.  These loans also go by the following names: 1 X Close, Single-Close Loan or OTC Loan.

We have done extensive research on the FHA (Federal Housing Administration), the VA (Department of Veterans Affairs) and the USDA (United States Department of Agriculture) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially. provides information and connects consumers to qualified One-Time Close lenders in an effort to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.

Please note that investor guidelines for the FHA, VA and USDA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs:  Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.

Your email to authorizes to share your personal information with a mortgage lender licensed in your area to contact you.

  1. Send your first and last name, e-mail address, and contact telephone number.
  2. Tell us the city and state of the proposed property.
  3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good – (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
  4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veteran’s, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $750,000 and review higher loan amounts on a case by case basis.   If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.
Joe Wallace - Staff Writer

By Joe Wallace

August 10, 2020

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for for (8) years and is currently the Associate Editor for

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About was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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