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

Buying a home can be an exciting yet stressful process. Deciding if you want to purchase an existing home or build a new one brings its own set of challenges. New construction allows you the flexibility to design your perfect home from the ground up. However, the traditional construction loan process requires two separate closings and can be confusing. This is where the FHA One-Time Close construction loan comes in.

As a leading mortgage expert, I’m constantly researching new loan programs to better serve my clients. The FHA One-Time Close construction loan has quickly become one of my favorite options to recommend. In this comprehensive guide, I’ll walk you through everything you need to know about this unique loan program.

What Is The FHA One-Time Close Construction Loan?

The FHA One-Time Close construction loan, also known as the FHA single close loan, combines your construction loan and permanent mortgage into one convenient loan. This government-backed program simplifies the home building process, saving you time and money.

Unlike a traditional construction loan the FHA One-Time Close loan only requires a single closing. One loan covers the entire process – from purchasing the land to financing the construction to securing the permanent mortgage once building is complete. No need for a second loan and second closing down the road.

Offered by FHA-approved lenders, these loans make homeownership more accessible. The FHA insures the loans, allowing for lower down payments and flexible credit requirements compared to conventional loans.

Key Benefits Of The FHA One-Time Close Construction Loan

This unique FHA loan program provides home buyers with numerous advantages:

• One closing – Single closing saves on closing costs and paperwork compared to two separate loans.

• Low down payment – Only 3.5% down payment required, making homeownership more affordable.

• Flexible credit – Minimum 580 FICO credit score required, with options for those with lower scores

• Mortgage insurance – Backed by the FHA, providing lender protections if you default.

• Interest-only payments – Pay only interest on the disbursed amount during construction to keep payments low.

• Permanent financing – Loan converts to a fixed-rate permanent mortgage once construction is done.

• Equity boost – As you make payments, you build equity in your new home.

The simplicity and versatility of the FHA One-Time Close construction loan opens the door for more home buyers to achieve their dream of building a custom home.

How The FHA One-Time Close Construction Loan Works

Now that you understand the basics of the program, let’s look at how this unique loan works from start to finish:

1. Find and secure land – Purchase vacant land you own, buy new land, or use land under contract.

2. Get prequalified – Work with an FHA lender to get prequalified and understand your budget and loan options.

3. Design plans – Create construction plans and select licensed contractor(s) for your home build.

4. Finalize loan details – Provide all required documents for underwriting of your land, builders, and home design.

5. Close on loan – At closing, your loan funds will be held in an escrow account.

6. Construction begins – Your contractor can now start building your home in stages.

7. Draw loan funds – As each stage is completed, your lender will release funds to pay your contractor. You only pay interest on the disbursed amount.

8. Construction completes – Once your home is finished, the loan converts to a permanent mortgage.

9. Make mortgage payments – You begin making principal and interest payments on your completed home.

At each step of the process, your lender and the FHA will provide oversight and ensure all requirements are met. The construction loan escrow account also protects your money until work is completed.

FHA One-Time Close Loan Requirements

While convenient, FHA One-Time Close loans do come with stricter requirements than conventional loans. Be sure you can meet the following criteria before applying:

For you:

• Minimum 580 FICO credit score (640+ recommended)

• Maximum 43% debt-to-income ratio

• At least two years of stable income/employment

• 3.5% minimum down payment

• Mortgage insurance premiums (upfront and annual)

For your property:

• Single-family home, condo, or manufactured home

• Located in FHA-approved area

• Meets FHA appraisal and inspection requirements

For your contractor:

• Must be FHA-approved

• Minimum 2 years experience

• Licensed and insured

• Provides new construction warranty

Meeting these requirements demonstrates you are qualified for the loan and able to successfully complete the construction project.

Interest Rates And Fees

Interest rates on FHA One-Time Close construction loans tend to run slightly higher than rates for FHA purchase mortgages. You can expect to see rates around 2-4% higher.

The reason for the rate premium is the higher risk associated with financing construction of a home that is not yet built versus purchasing an existing property. Your individual rates will depend on your credit score, debt-to-income ratio, down payment amount, and other personalized factors.

In addition to higher rates, you will pay the standard FHA mortgage insurance premiums – 1.75% of the loan amount upfront and 0.85% annually. Closing costs are also similar to a traditional mortgage.

The single closing saves significantly on costs compared to two separate construction loan and permanent mortgage closings. Shop multiple lenders to find the best rates and fees for your situation.

Finding An FHA One-Time Close Construction Loan Lender

Not all lenders offer FHA One-Time Close construction loans. I recommend starting your search on HUD.gov to find FHA-approved lenders in your state.

Vet any potential lenders thoroughly:

• Do they have experience with this loan program?

• How many FHA One-Time Close loans have they closed?

• Do they have dedicated construction lending specialists on staff?

• How quickly can they process, underwrite, and fund the loan?

• What are they requiring for minimum credit score and down payment?

Take your time and shop around for the right lender for your loan scenario. Having an experienced FHA lender by your side can make the construction loan process much smoother.

Pros And Cons Of The FHA One-Time Close Construction Loan

Before committing to this loan program, weigh the notable advantages and potential drawbacks:

Pros

• One loan and one closing

• Low down payment requirement

• Lenient credit score requirements

• Interest-only payments during construction

• Loan converts to permanent mortgage

Cons

• Limited flexibility in contractor requirements

• Stricter property standards for FHA appraisal

• Higher interest rates than conventional loans

• Required FHA mortgage insurance premiums

• Potentially limited lender options

While not perfect, the pros of simplicity and affordability often make the FHA One-Time Close construction loan a preferred choice for many borrowers.

Alternatives To The FHA One-Time Close Construction Loan

If this program doesn’t seem like the right fit, you may want to explore:

• Conventional construction loans – Require 20% down payment and 680+ credit score but feature better rates and more flexible requirements.

• Renovation loans – Fannie Mae HomeStyle and Freddie Mac CHOICERenovation loans allow you to finance purchase and renovation in one conventional loan.

• VA construction loans – Offer 100% financing and flexible credit requirements for eligible military servicemembers and veterans.

• USDA construction loans – Feature 100% financing and low rates for low-income borrowers in rural areas.

Each loan program comes with its own set of pros, cons, rates, fees, and eligibility guidelines. I can help you fully understand all of your construction loan options to find your best fit.

Turn Your Dream Of Building A Home Into Reality

As you can see, the FHA One-Time Close construction loan program provides an affordable and streamlined option for buying land and building a custom home with one easy loan process. If you’re looking to build, make sure to explore this option.

While these loans come with stricter requirements and potentially higher rates, they open up home construction to buyers who may not qualify through conventional financing. We can check your eligibility and customize quotes from lenders to ensure you get the optimal loan for your unique financial situation. I’m here as a trusted advisor to guide you every step of the way toward turning your dream home into a reality!