The Ins and Outs of 1 Time Close Construction Loans

Construction loans allow homebuyers to finance the building of a new home. Traditionally, you would need to get one loan for the construction phase and then another permanent mortgage once the home is completed. This requires two separate loan applications approvals, and closings.

With a 1 time close construction loan, you can wrap up the entire process in a single loan with one closing. This streamlines the home building process and saves the borrower time and money.

In this comprehensive guide, we’ll explain everything you need to know about 1 time close construction loans, also called single close loans or all-in-one construction loans

What is a 1 Time Close Construction Loan?

A 1 time close construction loan combines the short-term financing needed for construction with the permanent long-term mortgage in one simplified loan package.

With this loan product, you only go through the mortgage application, approval, and closing process once. One loan covers paying the builder throughout the building phase. Then it automatically converts to a traditional fixed-rate mortgage once construction is complete.

Benefits of 1 time close construction loans include:

• A faster, streamlined home building process
• Lower costs by avoiding multiple closings
• Loan pre-approval and locked-in interest rates early in the process
• Fixed monthly payments and predictable costs
• The ability to move into your home faster

These loans are a great fit for homebuyers who have their heart set on building their dream home from the ground up.

How Do 1 Time Close Construction Loans Work?

While the details can vary slightly between different mortgage lenders, the general process for getting a 1 time close construction loan is:

1. Get pre-qualified. Work with a lender to assess your finances and credit to determine the loan amount and terms you qualify for.

2. Find a lot and choose house plans. Look for land to build on and work with a builder to design home plans within your budget.

3. Submit loan application and documents. Provide income verification, credit history, and other paperwork needed for underwriting.

4. Loan approval. The lender will assess your application and issue a loan approval and interest rate lock.

5. Close on the construction loan. This involves signing closing documents and paying fees/deposits. It secures financing for the rest of the project.

6. Begin construction. Your builder can now break ground and start work on your new home.

7. Draw payments. As certain stages of construction are completed, the lender will release scheduled payments (draws) to compensate the builder.

8. Construction completes. Once your certificate of occupancy is issued, construction is officially done.

9. Loan modification. The construction loan converts into permanent financing as agreed upon initially.

10. Move in. After conversion, the home and mortgage are all yours. Make your first mortgage payment and move into your brand new house.

The single closing handles both the construction loan portion to pay the builder and the permanent mortgage you’ll have afterwards in one easy process.

Types of 1 Time Close Construction Loans

There are a few different types of 1 time close construction loans available, backed by different agencies. The most common options are:

• FHA construction loans – Insured by the Federal Housing Administration. Low down payments as little as 3.5%.

• VA construction loans – For veterans/military members. No down payment required.

• USDA construction loans – For properties in rural locations. 100% financing available.

• Conventional construction loans – Loans not backed by a government agency. Typically require 10-20% down.

Government-backed loans like FHA, VA, and USDA allow buyers to get into a new construction home with very little money down. That makes them popular choices for first-time homebuyers.

Conventional loans require more cash upfront but may offer lower rates/fees. Your lender can help you choose the optimal loan program for your specific situation.

What are the Benefits of 1 Time Close Construction Loans?

There are many advantages to using a 1 time close construction loan rather than a traditional two-step construction-to-permanent loan structure.

Streamlined Process

The single closing simplifies the loan process. You only need to complete one mortgage application and underwriting.

Cost Savings

You’ll save significantly on closing costs by only paying them once. This avoids duplicate fees for appraisals, inspections, and more.

Rate Lock

Your interest rate is secured for the entire project at the first closing. This prevents surprises if rates rise during construction.

Predictable Payments

Monthly payments are fixed. You won’t get hit with higher costs once the permanent mortgage takes over.

Faster Occupancy

You can move into your completed home sooner without the delays of applying for a second loan.

Easier Qualification

Lenders can better account for the full costs with one comprehensive loan review. This improves approval odds.

The convenience and savings of wrapping up construction financing and permanent mortgaging in one loan makes 1 time close products very appealing to new construction home buyers.

What are the Drawbacks of 1 Time Close Construction Loans?

While they offer many perks, 1 time close construction loans do come with a few downsides to consider as well:

Higher Upfront Fees

Closing costs may be a bit higher because the single loan involves more processing on the lender’s end.

Extra Planning Required

You’ll need to have detailed construction plans and accurate cost estimates to get approved.

Rigid Draw Schedule

Funds are disbursed to the builder in preset installments, regardless of actual construction timelines.

Extended Lock Periods

Your rate lock may last 8-12 months to account for the full construction timeline. An unused portion of your lock period equals money lost.

Tighter Eligibility Standards

Lenders impose stricter credit and income requirements compared to a typical mortgage due to the added risk.

While not ideal for every buyer, 1 time close construction loans provide excellent benefits like simplicity and savings for many new construction home shoppers.

What Credit Score is Needed for 1 Time Close Construction Loans?

Credit requirements for 1 time close construction loans are higher than standard mortgages. Specific minimum scores vary by lender and loan program, but you can expect to need:

• FHA loans – Minimum 580 credit score, with scores of at least 640 qualify for better terms.

• VA loans – Minimum 620 credit score to be eligible. 660+ scores get the best rates.

• USDA loans – No defined minimum, but most lenders look for at least 640.

• Conventional loans – Require a 680+ minimum credit score for approval.

The higher score requirements account for the increased risk of financing construction. Excellent credit in the 720+ range will qualify you for the most favorable loan terms. Work on improving your credit before applying.

Do You Need a Down Payment for 1 Time Close Construction Loans?

Down payment requirements depend on the loan program:

• FHA – 3.5% down payment required.

• VA – No down payment required for most borrowers.

• USDA – 100% financing available, no down payment.

• Conventional – Typically 10-20% down payment.

One of the biggest perks of government-backed loans like FHA, VA, and USDA is the ability to buy or build a home with little or no money down. Conventional loans require larger down payments.

How Much do 1 Time Close Construction Loans Cost?

The costs of a 1 time close construction loan include:

Upfront Costs

• Origination fee – 1-2% of loan amount
• Closing costs – $3,000 to $10,000+
• Appraisal fee – $400 to $800
• Down payment (if applicable)

Ongoing Costs

• Interest rate – Rates currently 5% to 7% for well-qualified borrowers

• Mortgage insurance (if applicable) – 0.5% to 1% of loan amount per year

Upfront costs for just one closing can be higher than a typical mortgage. But you save significantly by avoiding duplicate closing costs in the long run.

Interest rates and monthly payments are very similar to a standard fixed-rate mortgage. In total, expect to pay comparable overall costs for a 1 time close construction loan.

The Bottom Line

1 time close construction loans offer homebuilders an efficient process to finance building a custom home. With preliminary approval and costs secured upfront, you can build your dream home without surprises. While they have some limitations, 1 time close loans provide an excellent funding solution for constructing a new house with minimal hassle.