Buying or building a home is one of the most exciting things you can do in life. However, it also comes with a lot of big decisions and costs. One major choice you’ll have to make is how you want to finance your new home. There are many options when it comes to home loans, but one great choice for building a custom home from scratch is the one time construction loan.
In this comprehensive guide, we’ll walk through everything you need to know about one time construction loans. We’ll cover what they are their benefits, requirements, types, how they work and frequently asked questions. By the end, you’ll understand if a one time construction loan is the right choice to finance your custom built dream home!
What is a One Time Construction Loan?
A one time construction loan, also called a single close construction loan, combines a short-term construction loan with a long-term mortgage into one loan with just one closing. This avoids the hassle and fees of getting separate construction financing and permanent financing.
With a traditional construction loan, you would get approved for short-term financing to cover the building of the home. Then once construction is complete, you have to apply and get approved for permanent long-term financing to actually own the home. This means paying closing costs twice and essentially getting two loans.
With a one time close construction loan, the construction financing and permanent mortgage are wrapped up into one loan, so you only go through the mortgage process once. You are approved for one loan that will cover construction and then transition into a traditional fixed-rate mortgage once the home is built There is only one closing, which saves time and money
Benefits of One Time Construction Loans
There are many advantages to using a one time construction loan rather than separate construction financing and a permanent mortgage
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Simplified process: You only fill out one loan application and go through underwriting once. This saves you time and paperwork.
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One closing: You only pay closing costs and fees once, avoiding duplicate costs.
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Interest-only payments: You make lower interest-only payments while construction is ongoing.
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Lock in interest rate: You can lock in a fixed interest rate, avoiding rate hikes.
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Lower costs: The single closing can add up to thousands in savings.
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Build custom home: Design the house of your dreams from the ground up.
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flexible options: Can be combined with FHA, VA, USDA loans if you qualify.
Requirements for One Time Construction Loans
While requirements vary a bit by lender and loan type, here are some standard qualifications for one time construction loans:
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Down payment: Typically 3.5% to 20% down required. Gifts or land value may help.
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Credit score: Minimum 620 credit score, but 640+ better rates.
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Income/employment: Steady 2-year income history with proof required.
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Mortgage insurance: Required on most loans except VA loans.
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Property requirements: Must be primary residence for FHA & VA loans.
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Plans/specs: Detailed home plans required for appraisal.
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Inspections: Home must pass inspections once completed.
Talk to a loan officer to learn the specific requirements for your situation. VA, FHA and USDA loans may have different qualifications.
Types of One Time Construction Loans
There are a few main types of one time construction loans:
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Conventional 97: Up to 97% LTV allowed. Need 680+ credit score.
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FHA One-Time Close: Backed by FHA. Minimum 580 credit score.
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VA One-Time Close: For veterans/service members. No down payment needed.
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USDA One-Time Close: For rural properties. 100% financing available.
The type of loan you qualify for will depend on your specific financial situation. Your loan officer can guide you on the best loan type for your needs.
How Do One Time Construction Loans Work?
While the process can vary slightly by lender, here is an overview of how most one time construction loans work:
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Find a reputable general contractor to build the home. They must be approved by the lender.
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Work with contractor to create detailed home plans and specifications. These are required for appraisal and approval.
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Submit loan application with income/employment verification, credit history, assets, property information, and home plans.
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Get loan approval after undergoing underwriting for the combined construction financing and permanent mortgage.
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Close on the loan and pay closing costs/fees. This is the one and only closing.
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Start construction on your custom home while making interest-only payments to lender.
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Once home is built and passes inspections, loan transitions to fixed-rate permanent mortgage.
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Make first principal and interest payment on your new home!
Throughout the process your loan officer will guide you on next steps and requirements. The construction phase also involves submitting draw requests and working with inspectors to ensure proper budgeting.
Frequently Asked Questions about One Time Construction Loans
What is the difference between a construction loan and a one time construction loan?
A regular construction loan only provides short-term financing for building the home. You have to apply separately for permanent financing. A one time construction loan includes both construction financing and permanent financing in one loan.
What are the rates and fees for one time construction loans?
Rates and fees are similar to traditional mortgages, though interest rates may be slightly higher. Closing costs are less since you only pay them once. Talk to a loan officer about current rates.
How much down payment is required?
Typically 10-20% down payment is required, but loans like FHA and VA allow as low as 3.5% down. Gifts and land equity can also help cover the down payment.
Can I get a fixed rate?
Yes, one time construction loans often allow you to lock in a fixed rate. You also have the option of adjustable rate mortgages.
How long does the construction phase last?
The construction phase typically lasts 6-12 months but can vary depending on the size of the home. Your contractor will estimate the construction timeline.
What happens if construction goes over budget?
You will need a construction contingency fund to cover any unexpected overages. It’s smart to have 5-10% extra budgeted.
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- Beginning construction: After close you can start constructing the home you’ve always wanted.