What are One-Time Close Construction Loan Requirements?

What are One-Time Close Construction Loan Requirements?

Since One-Time Close Construction (OTC) loans are a group of loans that encompass different loan types, their requirements depend on which specific type you apply for. For instance, an FHA OTC loan has a minimum credit score of 580, while a Conventional OTC might have a credit score requirement as high as 680 or more.

OTC loans finance both home construction and a traditional home loan together and combine them into a single, streamlined process. To qualify, you must meet the following key requirements:

Credit score for OTC loans

A minimum FICO score of 620 is often required, however the credit requirements will depend on the loan type. For instance, an FHA OTC usually has a minimum credit score requirement of 580. As with other loan types,  higher scores often to better terms. Check your credit report for any errors and address them before applying.

Down payment requirement for an OTC

A down payment of 0% to 20% of the total loan amount is usually required for an OTC. The amount will vary depending on your loan type. For example, a VA OTC will generally require no money down, while a Conventional loan may require between 3.5%-20%. Gift funds can be used to help with your down payment.

Income verification

Like all home loans, OTC loans require borrowers to provide income verification like recent pay stubs, tax returns, and bank statements. Self-employed individuals may need additional documentation like profit and loss statements.

Employment stability

Lenders generally require proof of employment stability for OTC loans. This means they’ll want to see a stable income history usually for a minimum of two years.  Self-employed individuals may need to provide more documentation.

Property appraisal and inspection for OTC loans

OTC loans require an appraisal to determine the property's value and the completed home's value. This helps set the loan-to-value ratio and ensures the project is financially viable. The home must pass also pass inspections once construction is complete.

Property requirements

The property must be your primary residence for FHA and VA loans, Conventional loans may allow the property to be a secondary residence as well.

Construction plan and budget

Your lender will likely want you to submit detailed blueprints, a timeline, and a realistic budget when you apply for an OTC loan. They will review these to ensure that the project is feasible and that the budget is accurate.

Builder qualifications for OTC loans

Choose a licensed and insured builder with a strong track record of completed projects. Some lenders have pre-approved builder lists. Your lender may also review the contract you have with your builder.

Permits and approvals

Before approving you for an OTC loan, your lender will want to verify your building permits and local approvals to make sure your project is legally sound. Make sure all of the necessary permits and approvals are in place.

Environmental impact assessment

If the property is in an environmentally sensitive area, your lender may require an environmental impact assessment may be necessary to identify potential issues.

By meeting these requirements, you can increase your chances of a successful OTC construction loan application and ensure a smoother building process. Whether you are a first-time homebuilder or an experienced one, these steps are crucial for achieving your goal of building a new home.