June 23, 2022
If you want to build a home on your own lot or on land you buy in conjunction with the project, you have two basic options to choose from. There is a type of construction loan that features two applications and two closing dates.
One is a loan to pay for the labor and materials in the construction of the property itself. Once the construction phase is over, the borrower applies for a second loan that pays off the construction loan and serves as the mortgage.
It is important to remember that the loan for building your house is not a 30-year mortgage. If you want to build a custom home this way, the first loan is sometimes called an interim loan with the second being referred to in the industry as a “take-out loan”.
Dangers for the borrower with this type of construction loan program include not being able to qualify for the second loan, and the interest rate on the interim loan may be variable, not fixed.
You also may not be able to get a mortgage rate lock for the take-out loan until construction is finished on the house. What will those mortgage rates look like then?
Your other option is an FHA One-Time Close mortgage, also known as a construction-to-permanent mortgage. These loans feature a fixed interest rate, have only one application and closing day, and you won’t have to worry about adjustable rates or qualifying twice. You can build on your own land or land you buy with the mortgage loan.
Those aren’t the only advantages to a One-Time Close loan; you won’t have to worry about paying closing costs on two transactions. That is one of the key advantages of this type of construction loan.
A construction loan with two closing dates means two sets of lender fees and other costs. One-Time Close mortgages also do not require two appraisals, you will only be responsible for a single process.
FHA One-Time Close mortgages typically feature lender requirements that include higher FICO scores but one thing to keep in mind is that the down payment rules for these loans are identical to other FHA mortgages.
That means you can qualify for a down payment on a construction loan that is only 3.5%, but your FICO scores will need to meet both FHA and lender requirements. For the FHA, on paper that includes FICO scores of 580 or better.
Talk to a loan officer about that financial institution’s specific credit qualifying requirements for FHA construction loans ahead of time for best results. If you need to work on your credit in the meantime consider giving yourself at least 12 months to do so before you submit a construction loan application.
Want More Information About One-Time Close Loans?
We have done extensive research on the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs) 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.
OneTimeClose.com provides information and connects consumers to qualified One-Time Close lenders 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 and VA 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.
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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 veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $1,000,000 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.