Everything You Need To Know About One Time Close FHA Construction Loans

Buying or building a new home is an exciting but often complicated process. Traditional construction loans require two separate closings – one for the construction loan and another for the permanent mortgage. This can add unnecessary hassle and expenses to an already stressful experience.

That’s where one time close FHA construction loans come in. As the name implies these special FHA-backed loans allow you to complete the entire home construction financing process in a single closing.

In this comprehensive guide we’ll cover everything you need to know about one time close FHA construction loans including

• What is a one time close FHA construction loan?
• How does it work?
• Types of one time close FHA construction loans
• Benefits over traditional construction loans
• Requirements and eligibility
• Interest rates and costs
• How to apply and get approved
• Alternatives to consider
• FAQs

Let’s get started!

What Is A One Time Close FHA Construction Loan?

A one time close FHA construction loan combines a short-term construction loan with a permanent traditional FHA mortgage into one streamlined financing package It allows you to purchase land, pay for construction costs, and secure a long-term mortgage with just one loan and one closing

These loans are backed by the Federal Housing Administration (FHA), which offers more flexible qualifying guidelines compared to conventional construction loans. The FHA insures the lender against loss in case of default, making it easier to get approved.

How Does A One Time Close FHA Construction Loan Work?

Here is a general overview of the one time close FHA construction loan process:

• Get pre-qualified – Work with an FHA-approved lender to assess your finances and get pre-qualified for a loan amount.

• Find land – Identify and purchase a property or vacant lot to build on. You can use land you already own, purchase land outright, or place under contract contingent on loan approval.

• Select a builder – Choose a licensed general contractor experienced with FHA construction loans. They must be approved by your lender.

• Finalize plans – Work with your contractor to complete house plans that meet FHA requirements. Plans must be appraised and approved.

• Close on the loan – At closing, you’ll finalize the loan amount to cover land, construction, and permanent financing.

• Start construction – Your contractor can begin building once loan is closed and funds are disbursed.

• Make interest-only payments – During construction, you only pay interest on the disbursed loan amount.

• Construction completes – After final inspection, the loan converts to a traditional FHA mortgage.

• Make principal and interest payments – You begin making regular mortgage payments on the full loan amount.

The single closing simplifies the entire construction loan process. You don’t have to re-apply or pay closing costs again when converting to permanent financing.

Types Of One Time Close FHA Construction Loans

The FHA offers two main types of one time close construction loans:

1. FHA Construction-To-Permanent Loan

This loan is designed for building a home from the ground up on vacant land. It finances the land purchase, construction, and permanent mortgage in one consolidated loan.

The construction-to-permanent loan can only be used for stick-built homes and manufactured housing built on-site. No single-wide mobile homes allowed.

2. FHA 203(k) Rehab Loan

This program covers purchasing and renovating an existing home with one loan. It offers two options:

• Limited 203(k) – For minor upgrades under $35,000
• Standard 203(k) – For major remodels and renovations

The 203(k) loan allows you to buy and customize a home to fit your needs with a simplified process. Cash-out can also be taken for extra renovations.

Benefits Of A One Time Close FHA Construction Loan

One time close FHA construction loans offer many perks compared to conventional construction loans or owning separate construction and permanent mortgages:

• One closing – Complete the entire financing process with a single closing, saving time and money.

• Lower down payment – FHA loans allow down payments as low as 3.5% of the total loan amount.

• More flexible credit – FHA approves borrowers with credit scores as low as 500-580.

• No cash contingency – All costs are bundled into the total loan, so no cash reserves are required.

• Interest-only payments – Keep costs manageable by only paying interest during the build.

• No second appraisal – The initial appraisal remains valid so a second appraisal is not required.

• Single underwriting – You go through the approval process just once for both loans.

• One set of closing costs – Pay closing costs and fees just one time instead of twice.

For many borrowers, the streamlined process and low down payment requirements make one time close FHA construction loans the ideal choice for financing their dream home.

FHA Construction Loan Requirements And Eligibility

While the FHA construction loan guidelines are more flexible than conventional loans, you still must meet certain standards to qualify and maintain eligibility.

Borrower Requirements

As the borrower, you must:

• Have a minimum credit score of 500-580

• Total debt-to-income ratio below 43%

• Have at least 3.5% down payment

• 2 years of steady employment and income

• No bankruptcy in past 2 years

• Meet FHA loan limits for your area

• Be able to pay mortgage insurance premiums

Property Requirements

The home or land you wish to purchase must:

• Be for your primary residence

• Meet FHA appraisal and inspection standards

• Be an eligible property type – single family home, condo, or manufactured home

• Adhere to HUD regulations and FHA minimum property standards

Contractor Requirements

Your chosen contractor must:

• Be properly licensed, bonded, and insured

• Have a minimum 2 years experience

• Be approved by lender to work with FHA loans

• Provide a new home warranty on construction

Meeting these requirements ensures you and the property are eligible for FHA-backed financing.

FHA Construction Loan Interest Rates And Costs

Interest rates – Expect rates 2-4% higher than traditional 30-year FHA mortgage rates. Rates vary based on your finances and credit.

Mortgage insurance – Upfront 1.75% of loan amount plus 0.85% annually. Removed once 20% equity reached.

Closing costs – Approximately 2-5% of the total loan amount, which covers lender fees, escrows, and other expenses.

Down payment – Minimum of 3.5% down required. Can go up to 10% or more based on your credit profile.

Land purchase – Land purchase and construction costs must be wrapped into total loan amount.

Inspections and permits – Borrower covers costs for required inspections and building permits.

Contingency reserve – Up to 10% of construction costs set aside for any unexpected overages. Unused funds go toward principal.

While costs are higher than a typical FHA loan, the one time close construction loan saves money by avoiding fees and interest for two separate loans.

How To Get Approved For An FHA Construction Loan

Follow these key steps for getting an FHA construction loan approved:

• Check your credit – Make sure your credit score meets the minimum FHA requirements. Review reports for errors.

• Get prequalified – Work with an FHA lender to assess finances and get prequalified for maximum loan amount.

• Find a property – Select land or existing home to purchase and construct upon.

• Pick licensed contractor – Find an experienced general contractor approved to work with FHA loans.

• Submit plans for approval – Provide house plans to lender to ensure they meet FHA standards.

• Gather documents – Have all needed documentation ready for the full underwriting process.

• Complete loan application – Formally apply for financing once preceding steps are done.

• Close on mortgage – Finalize the construction loan and start building after funds are disbursed.

Having an experienced loan officer guide you through the process can help ensure a smooth approval process.

Alternatives To One Time Close FHA Construction Loans

One time close FHA construction loans offer a convenient financing solution, but may not be right for everyone. Here are a few alternatives to consider:

Conventional construction loans – Require 20% down and 680+ credit score, but offer more flexibility.

VA construction loans – Offer 100% financing and lenient credit guidelines for veterans and military families.

USDA construction loans – Have 100% financing and income-based eligibility for rural properties.

Renovation loans – F