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

If you’re looking to build a new home or extensively renovate an existing property, an FHA one-time close construction loan could be the ideal financing solution. This unique loan product allows you to purchase land, finance construction costs, and obtain your permanent mortgage with just one loan and one closing.

I’ll explain what FHA one-time close construction loans are, their advantages, eligibility requirements, and the process of getting approved. By understanding how these versatile loans work, you can determine if an FHA one-time close construction loan is the right fit for your home building or renovation project.

What Is An FHA One-Time Close Construction Loan?

An FHA one-time close construction loan, also called the FHA construction-to-permanent loan, combines features of a short-term construction loan and a traditional FHA mortgage into one consolidated loan

Here are the key characteristics that make this loan product unique

• Single loan – The FHA one-time close loan finances the entire process, from land purchase (if needed) to construction to the permanent end mortgage, with just one loan. You don’t need to apply for and close on multiple separate loans.

• Single closing – Because it’s just one loan, the FHA one-time close construction loan requires only one closing. This saves you time, hassle, and closing costs compared to other construction loans that need two or more closings.

• Construction and permanent financing – The loan provides short-term financing for construction costs. Then once the home is completed, it converts automatically into a permanent FHA mortgage.

• Low down payment – You only need a 3.5% down payment on the total loan amount, significantly less than what conventional construction loans require.

• FHA-insured – These loans are insured by the Federal Housing Administration (FHA). The FHA backing makes lenders more willing to approve borrowers with lower credit scores or higher debt burdens.

The FHA one-time close construction loan gives home builders flexibility while streamlining the overall financing process into one easy loan product.

Benefits Of FHA One-Time Close Construction Loans

There are many advantages that make the FHA one-time close construction loan worthwhile for eligible borrowers:

• Lower down payment – The minimum down payment is just 3.5% of the total loan amount, versus 15-20% or more for conventional construction loans. This makes financing more affordable.

• Requires only one closing – You’ll save significantly on closing costs by only needing one closing versus separate closings for the construction loan and permanent mortgage.

• Shorter construction loan period – Your interest rate converts from the construction phase to permanent financing once building is complete, saving money compared to staying in short-term financing longer.

• Versatility – The loan can be used to purchase land, finance new construction, or fund renovations and repairs when coupled with an FHA 203(k).

• One set of loan qualifications – You go through FHA’s approval process just once rather than needing to qualify again when seeking permanent financing.

• Fixed interest rate – Your interest rate remains steady throughout the construction period and when the loan converts to your permanent mortgage.

• Lower credit score requirements – FHA accepts credit scores as low as 500 with a 10% down payment or 580 with 3.5% down, making approval more accessible.

For home buyers who want an easy one-and-done financing solution, the FHA one-time close construction loan can be an attractive option.

FHA One-Time Close Construction Loan Requirements

While the FHA one-time close construction loan offers more flexibility than conventional loans, there are still borrower and property requirements you must meet to qualify:

Borrower Requirements

• FICO credit score of at least 580
• Maximum debt-to-income ratio of 43%
• At least two years of consistent employment history
• Money to cover any required down payment

Property Requirements

• Primary residence only; investment properties don’t qualify
• Located in an FHA-approved area
• Eligible property types include single-family homes, condos, and manufactured housing
• Appraised as-completed value must not exceed FHA loan limits

Construction Requirements

• Licensed general contractor with minimum 2 years experience
• Mandatory inspections by qualified professionals at certain milestones
• New construction warranty covering materials and workmanship

Meeting these requirements demonstrates you are in a financial position to manage the loan responsibly.

How To Get Approved For An FHA One-Time Close Construction Loan

Now that you understand the basics of FHA one-time close construction loans, here are the main steps to getting approved:

1. Find land to build on

• If you don’t already own a lot, you’ll need to purchase one outright or place under contract contingent on loan approval.

2. Select house plans

• Finalize your building plans and get required permits before applying for financing.

3. Choose a general contractor

• Find an FHA-approved contractor experienced with new builds who can provide a construction bid.

4. Get pre-approved

• Apply with an FHA lender and get pre-approved so you know your loan amount and can move quickly.

5. Order appraisal

• An appraiser will estimate the as-completed value of the home to determine loan-to-value ratios.

6. Finalize details

• Your lender will review your land purchase contract, builder agreement, permits, and other items.

7. Close on the mortgage

• After your lender underwrites and approves the loan, you’ll close on the financing and start building!

Finding The Best FHA One-Time Close Construction Loan Lender

Not all lenders offer FHA one-time close construction loans, so finding one can take some searching. Here are tips for picking the right lender:

• Look for an FHA-approved lender familiar with these loans.

• Ask about their construction loan experience and portfolio of completed projects.

• Seek lenders offering the features you want like low rates, flexible terms, strong customer service.

• Get multiple loan estimates so you can compare total costs.

• Read online reviews to evaluate customer satisfaction.

Taking the time to shop around helps you discover lenders best equipped to handle FHA one-time close construction loans and get the deal most favorable to your situation.

Alternatives To The FHA One-Time Close Construction Loan

If the FHA one-time close construction loan turns out not to be the right solution for you, here are a few alternatives worth considering:

Conventional Construction Loans

Conventional construction loans typically have stricter eligibility requirements but may offer more flexibility and lower rates. The downside is most conventional loans require two closings.

VA Construction Loans

For qualifying military members, Veterans Affairs construction loans feature 100% financing, no PMI, and lenient credit guidelines. These loans can be used to build or renovate a home.

USDA Construction Loans

For low- to moderate-income borrowers in rural locations, USDA construction loans provide 100% financing and below-market interest rates. You don’t need a down payment.

Renovation Loans

FHA 203(k) and HomeStyle renovation loans allow you to finance home improvements along with purchasing an existing property rather than new construction.

The Bottom Line

With just one loan and a single closing, FHA one-time close construction loans simplify financing a custom built home. Lower FHA down payment requirements and flexible credit guidelines expand access to home ownership. If you’re looking to build, the FHA one-time close loan could make your dream home a reality.