The Ultimate Guide to All In One Construction Loans

An all in one construction loan, also known as a one-time close construction loan or single-close construction loan, allows you to finance the construction of a new home and provide permanent financing with just one loan and one closing. This type of loan covers the costs to purchase the land, build the home, and then converts into a traditional fixed-rate mortgage once construction is complete.

All in one construction loans provide several advantages over other types of construction loans. With a traditional construction loan, you would need to obtain one loan to cover construction costs, and then replace it with permanent financing once the home is move-in ready This requires paying closing costs twice With an all in one loan, you only pay closing costs once, streamlining the process.

These loans also allow you to lock in your interest rate upfront for the permanent mortgage. This protects you from rate hikes that could occur while the home is being built. Below we’ll explore all in one construction loans in more detail including pros and cons, types of loans, and steps for getting approved.

How All In One Construction Loans Work

All in one construction loans are a type of bridge loan that is used specifically to finance the building of a new home from the ground up. Here is an overview of how these loans work:

• You purchase the land or lot you plan to build on. The loan covers this cost.

• The lender releases funds incrementally to your builder as certain stages of construction are completed. This is known as the construction phase.

• Once construction is finished and you obtain a certificate of occupancy, the loan converts to a traditional fixed-rate mortgage. This is the permanent phase.

• You begin making payments on the permanent mortgage for the remainder of the loan term

During the construction phase, the lender will only release funds after inspections are completed by their third-party inspector at specific intervals. This ensures the work is being completed according to plan.

The conversion to the permanent mortgage is automatic. You don’t need to requalify or obtain new financing. The loan simply switches to acting like a traditional 30-year fixed mortgage.

Pros and Cons of All In One Construction Loans

All in one construction loans offer many benefits, but also some downsides to consider:

Pros

• One loan, one closing – Saves on closing costs
• Interest rate locked in upfront – Avoid rate hikes
• Automatic conversion – Streamlines process
• Lower down payment – As low as 3.5% on some loans
• One point of contact – Simplifies construction phase

Cons

• Higher rates and fees – Cost more than traditional mortgages
• Strict requirements – Inspections at various stages
• More complex process – Requires contractor participation
• Higher credit and income requirements – Compared to regular loans
• Difficult to compare – Rates and terms vary widely by lender

As you can see, the main tradeoff is cost and convenience. All in one loans cost more but greatly simplify the construction loan process.

Types of All In One Construction Loans

There are several types of mortgages that can be used as all in one construction loans. The most common options are:

• FHA construction-to-permanent loan – Insured by the Federal Housing Administration (FHA). Low down payment options and flexible credit requirements. Must pay mortgage insurance.

• Conventional construction-to-permanent loan – Offered by private lenders. Require stronger credit and income. Typically need 10-20% down payment.

• VA One-Time Close loan – For veterans and service members. Requires no down payment or mortgage insurance.

• USDA Single Close loan – For low/moderate income borrowers in rural areas. No down payment required. Low mortgage insurance cost.

FHA and VA one-time close loans are the most popular because they offer the lowest down payments and most flexible credit guidelines. USDA loans have income limits and location requirements. Conventional loans have the strictest standards.

Getting Approved for an All In One Construction Loan

The process of getting approved for an all in one construction loan is more complex than a regular mortgage. Here are the basic steps:

1. Check your finances – These loans require stronger credit, income, and assets than traditional loans. Ensure you meet the lender’s specific guidelines.

2. Find land to build on – Locate a lot or parcel of land you want to purchase to build your home on.

3. Partner with a builder – Find a qualified general contractor or home builder to construct the home.

4. Create construction plans – Work with your builder to design plans and create a detailed construction budget.

5. Get pre-approved – Apply for financing and go through the lender’s approval process. Lock in your interest rate.

6. Close on the land – Use the loan to purchase the lot you will build on.

7. Oversee construction – Your lender will release funds in increments as work is completed.

8. Close on the permanent mortgage – Once construction is finished, the loan converts to the permanent mortgage.

This process requires extensive coordination between you, the lender, and builder. Having an experienced real estate agent can help guide you through each stage.

Be aware that until construction is complete, you take on some risk that the project stays on track. Try to budget extra in case unexpected costs pop up – new construction almost always ends up costing more than initial estimates.

Alternatives to All In One Construction Loans

While all in one construction loans simplify the building process, they aren’t right for everyone. Here are a few alternatives to consider:

• Two separate loans – You can get a short-term construction loan, then replace it with permanent financing later. Requires paying closing costs twice.

• Home equity loan – If you have substantial equity, you may be able to tap it to finance construction. Functions like a second mortgage.

• Personal loan – Could be an option if you just need a small amount of cash and have strong credit.

• Renovation loan – To remodel or add on to an existing home. Options include FHA 203(k), Fannie Mae HomeStyle, and VA IRRRL.

• Owner financing – In some cases, the property seller may agree to finance the land purchase and construction.

Evaluate both all in one construction loans and alternative financing to pick the best option for your unique situation. Connect with a qualified loan officer to go over the pros and cons of each.

FAQs About All In One Construction Loans

What is the typical down payment for an all in one loan?

The required down payment varies by loan type. FHA loans allow down payments as low as 3.5%. Conventional loans often require 10-20%. VA and USDA loans need no down payment in most cases.

What credit score is needed?

The minimum credit score is around 580 for FHA loans. Conventional loans often want scores of at least 620. VA has no minimum score. USDA looks for a score of at least 640.

How long does the construction phase usually last?

The construction phase typically lasts 6-12 months, but can vary substantially based on the size and complexity of the home. Expect at least a few months longer than your builder’s initial estimate.

What happens if construction goes over budget?

You may need to use your own funds or apply for a modification to receive additional loan funds. Careful planning and getting multiple bids can help avoid going over budget.

Can an all in one loan be used for renovations?

In most cases, no. All in one loans are meant for new construction only. To finance renovations to an existing home, a renovation loan like a 203(k) or HomeStyle would be needed.

The Bottom Line

All in one construction loans can be an excellent choice for financing a new, custom-built home. By combining construction financing and a permanent mortgage into one, they streamline the entire building process. Weigh the pros and cons carefully when deciding if one of these specialized loans is right for your construction project. Connect with an experienced loan officer to discuss your specific needs and goals to select the optimal loan program.