Types of One-Time Close Construction Loans

Types of One-Time Close Construction Loans

One-Time Close (OTC) construction loans are a group of loans that come in many different loans types including Conventional, VA, FHA, and USDA. Each loan type has its own unique qualifications and requirements. OTC loans are a specialized form of financing designed to streamline the process of building a new home. Understanding the loan options available with OTC loans can help you choose the best loan for your specific needs.

Conventional One-Time Close construction loans

Conventional OTC loans are the most common type and are offered by private lenders. These loans are not backed by government programs and are subject to the lender's underwriting standards. To qualify, you generally need a minimum credit score of 620* or higher, a low debt-to-income ratio (43% or lower), and a down payment ranging from 3% to 20% of the total project cost. They may also require private mortgage insurance, depending on how much money you’re able to put down.

Conventional OTC loans are ideal for borrowers with strong financial profiles and a clear, detailed construction plan.

FHA One-Time Close construction loans

FHA One-Time Close loans are backed by the Federal Housing Administration (FHA) and are designed to make homebuilding more accessible to a broader range of borrowers. FHA loans have more lenient credit and down payment requirements compared to Conventional loans.

For example, you may be able to qualify with a credit score as low as 580 and a down payment as low as 3.5%. However, FHA loans come with additional requirements, such as the need for a property to meet certain safety and structural standards. They also require FHA specific mortgage insurance. These loans are particularly beneficial for first-time homebuyers or those with limited financial resources.

VA One-Time Close loans

VA One-Time Close loans are guaranteed by the Department of Veterans Affairs (VA) and are available to eligible veterans, active-duty service members, and surviving spouses. These loans offer competitive interest rates and no down payment requirement, making them an attractive option for military personnel.

VA OTC loans also have more flexible credit requirements, with some lenders accepting credit scores as low as 620. VA OTC loans come with a funding fee, which can be rolled into the loan amount, and they require the property to meet specific VA guidelines for safety and livability.

USDA One-Time Close loans

USDA One-Time Close loans are backed by the United States Department of Agriculture (USDA) and are designed for lower- to moderate-income borrowers in rural areas. These loans offer 100% financing, meaning no down payment is required, and they have relatively low interest rates. To qualify, the property must be located in a designated rural area, and the borrower must meet income limits. They do also generally require a minimum credit score of 640. USDA OTC loans may also allow for closing costs to be financed and may provide the option for no payments while the home is being constructed.