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One-Time Close Construction Loan Overview

The decision between finding the perfect house and building the home of your dreams can be a difficult one to make. Both options require planning and there are many factors to consider, including which loan type is right for your needs.

Often, a borrower may buy a house with one mortgage, only to discover later down the road that there are renovations that need to be done or that they want to make additions, like extra bedrooms, and will need to refinance or take out a second loan to do so. With a One-Time Close Construction loan (also known as a Single Close Loan), you can build your dream home from scratch, designing it exactly how you want the first time, without the hassle and costs of multiple loans.

What is a One-Time Close Construction Loan?

man sits at his desk sketching out construction plans for a home

Construction loans are temporary loans designed to finance the financial costs of building your own home. They are a separate program than a traditional mortgage. The Construction loan is to cover the specific building costs like materials, labor, land, onsite utilities etc. then you would also need a home loan, like a Conventional loan or an FHA loan to finance the home. In order to get approved for both of these loans, you would generally have to fill out two different applications and pay closings costs on the two separate loans.

A One-Time Close Construction loan combines a traditional construction loan and a mortgage into one loan. This means that you only have to apply once to be approved and only have to pay one set of closing costs.

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One-Time Close (OTC) Benefits

One-Time Close Construction loans can be beneficial to homebuyers who want to build their dream home from scratch without the complication of having two separate loans. They have many benefits including:

  • A simplified application process: With a One-Time Close Construction loan, you only have to fill out one loan application for approval. You’ll need to provide the standard information like personal identifying information, your current financial information, and your credit profile. Then you and your lender will agree on the terms and conditions of your loan, such as your interest rate, loan amount, and loan type. This process can potentially save you time compared to other construction loans, since you’re only filling out one application instead of two.
  • Interest-Only payments: One-Time Close Construction loans allow you to make interest-only payments while you are in the process of building your home. This means your monthly payment will be lower while you’re focused on construction, then, once your dream home is completed, you will transition from paying off only the interest portion of your loan to making payments towards the principal as well.
  • Lock in a fixed interest rate: Fixed-rate mortgages are an option you can choose when you use a One-Time Close Construction loan. This means that you won’t have to worry about your interest rate changing over the course of your loan. Interest rates fluctuate according to changes in the economy and movements of government organizations like the Federal Reserve, so locking in your interest rate can give you more peace of mind knowing that your payments won’t increase over time.

Borrowers also have the option to use our 12-month extended rate lock an float down their rate within the first 30 days. This means that they have the option to lock in their loan rate upfront and are able to change it within 30 days of their home being completed to match the current market rates.

  • Potentially lower closing costs: Since One-Time Close Construction loans only require you to complete one closing instead of two, you may be able to save money. Closing costs often include things like service and administrative fees, avoiding paying those fees twice could save you money on your loan.
  • Down payment options: Because a One-Time Close Construction loan can be used in conjunction with a VA loan or an FHA loan, your down payment options may be flexible depending on which loan program you qualify for.
  • Build your dream home: When you choose a One-Time Close Construction loan, you’re giving yourself the freedom to build your dream home from scratch. This means you’re in control from the beginning and don’t have to worry about waiting to afford additions or renovations in order to have the home you’ve always wanted.

What are One-Time Construction Close Loan Requirements?

The requirements for One-Time Construction Close loans will depend on which type of loan you qualify for. For instance, in order to qualify for a VA OTC loan, you will need to meet the eligibility requirements for time served in the military or other qualified organizations, have a credit score of at least 620.

In order to qualify for an FHA OTC loan, you’ll need a minimum credit score of 580.

Other requirements that you will need to keep in mind depending on which loan type you apply for are:

  • Down payment: Each loan type will require the ability to pay a different down payment amount anywhere between 0% - 20%. Gifts or land equity may also be allowed as down payment assistance.
  • Mortgage insurance: Different loans types come with different mortgage insurance types that you may be required to have. These include Private Mortgage Insurance for Conventional loans and a mortgage insurance premium for FHA loans.
  • Proof of a steady and consistent income for a minimum of two years: This can include bank statements, W-2s, and tax returns.
  • Property requirements: One-Time Close Conventional loans allow for the property to be a primary or secondary residence. For One-Time Close VA and FHA loans, the property must be a primary residence. Investment properties are not allowed for any One-Time Close loan type.
  • Home plans and specifications, appraisals, and home inspections: Borrowers are required to have the home plans and specifications upfront in order to have the home appraised. In addition, a home inspection is required once the home is completed.

One-Time Close Construction loans are more complex than many mortgages on the market. Contact New American Funding to get more information about qualifications and requirements for these loans. A Loan Officer will be happy to answer your questions and help you find which loan is right for your unique needs.

Types of One-Time Closing Loans

There are many types of One-Time Close Construction loans. They include:

Conventional Single Close Construction Loans: These loans are not backed by the government, meaning they have different applicable qualifications than other Single Close loans. For a Conventional Single Close loan, you will likely need a credit score of 680 to qualify, you will need to prove that you either own or are going to purchase the lot that you want to build on, and your LTV will need to be less than or equal to 95%.

VA Single Close Construction Loans: These loans are only available to qualified veterans, military servicemembers, and eligible spouses. They are backed by the United States Department of Veterans Affairs and were created to help military members achieve homeownership. They often have lower interest rates than Conventional loans and also have no down payment requirement.

FHA Single Close Construction Loans: These loans are backed by the Federal Housing Association and are designed as a resource for borrowers who may have less-than-perfect credit. A minimum credit score of 580 is required. Lenders may accept a minimum credit score of 500 for these loans, but anything under 580 will have a capped LTV of 90% and the down payment requirement will be higher. FHA Single Close loans will also accept a higher DTI than many other loans.

How One-Time Close Construction Loans Work

One-Time Close Construction loans are a more complex process than many other home loans. However, there are several steps that are common. These include:

  1. Choosing a builder: Before you begin building your dream home it is imperative that you choose the builder and contractors you want to hire for your project. It is important to note that your team will need to be approved by your lender before you can obtain the loan.
  2. Preparing a contract: You and your builder will need to work together to create a Construction contract. This document will contain the agreed upon parameters of your construction project like the timeframe and cost.
  3. Prepare required plans and specifications for home: Lenders require plans and specs. before they are able to appraise the property to approve the loan. In addition, for FHA and VA Single Close loans, an initial survey is required. A lot contract may also be required. You Loan Officer will be able to help you understand the requirements for your induvial loan.
  4. Beginning the loan process: The loan process for a One-Time Close Construction loan can be more complicated than other loans. However, it will still require the same basic information like proof of income, your credit profile, your DTI, and your available assets.
  5. Closing the loan: Once your loan application has been approved you’ll close on your loan and be able to start building the home of your dreams.
  6. Beginning construction: After close you can start constructing the home you’ve always wanted.

One-Time Close Construction Loan FAQs

What is the FHA One-Time Close Loan?

FHA One-Time Close loans are One-Time Close Construction loans that are backed by the Federal Housing Administration. FHA loans were created to enable borrowers with less-than-perfect credit qualify more easily for a home loan. The FHA One-Time Close Construction loan combines the flexibility and security of government-backed FHA loan with the building financing of a Construction loan.  

What is the VA One-Time Close Loan?

The VA One-Time Close loan is a One-Time Close Construction loan that is under the governance of the U.S. Department of Veterans Affairs. VA loans are designed to assist veterans, servicemembers, and other eligible military associates with housing. The VA One-Time Close loan allows borrowers to use the benefits available to them from the VA, such as no down payment requirement, in conjunction with the financing of a Construction loan.

What is a Single Close Construction Loan?

A Single Close Construction loan is another name for a One-Time Close Construction loan. These loans combine the standard short-term Construction loan with a long-term home loan. Typically, when a borrower wants to build a house from scratch, they would have to take out a Construction loan to finance the costs of the build itself, then a second mortgage to finance the home once its built.

A Single Close Construction loan combines these two programs into one, which streamlines the application and approval process, since it is one loan instead of two, and allows borrowers to only pay one set of closing costs.

What is the minimum FICO score for a One-Time Construction loan?

The minimum credit score for a One-Time Construction loan depends on which type of loan you qualify for. FHA and VA loans usually require a minimum credit score of 640. However, 580-640 may be acceptable with AUS approval, while Conventional loans require a higher score of 680 or more.

A Loan Officer at New American Funding can look over your current credit profile and help you find which loan programs you’re able to qualify for.

What is the difference between a mortgage and a Construction loan?

A Construction loan is a short-term loan designed to finance the actual costs of building your own home from scratch. These costs can include the cost of the physical materials, labor, and necessary permits.

A mortgage is a long-term home loan designed to finance your home after it’s been completed.

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