Everything You Need to Know About FHA Single Close Construction Loans

If you’re looking to build your dream home, an FHA single close construction loan may be the ideal financing option for you. With this type of loan, you can purchase land and finance construction costs all wrapped into one mortgage loan with a single closing.

As a first-time homebuyer trying to navigate the complex world of mortgages the single close construction loan stands out for its convenience and flexibility. Instead of applying for one loan to buy the land another loan for construction costs, and finally a permanent mortgage, this loan consolidates it all into one.

In this comprehensive guide, we’ll walk through what FHA single close construction loans are, their benefits, eligibility and requirements, the process from start to finish, and extra tips for securing your loan. Let’s get started!

What is an FHA Single Close Construction Loan?

An FHA single close construction loan is a mortgage insured by the Federal Housing Administration that lets you finance the construction of a new home in one simplified loan, It wraps together

• The purchase of land to build on
• Construction costs
• The permanent mortgage once construction is complete

With this streamlined approach, you only go through the mortgage process once and have a single closing for the combined costs. The convenience of this lies in avoiding multiple loan applications, closings, and sets of closing costs.

As a government-insured loan, FHA single close construction loans offer competitive interest rates and easier qualifying standards like low down payments. This makes building a custom home more affordable and attainable, especially for first-time homebuyers.

Top 5 Benefits of FHA Single Close Construction Loans

Here are the main advantages that set FHA single close construction loans apart:

1. One loan for the full cost – The single close loan finances everything upfront so you don’t have to shop for multiple loans.

2. One closing session – You only pay closing costs once, saving thousands in fees.

3. Fixed low interest rate – Enjoy a low fixed rate locked in for the 30-year term of the mortgage.

4. Lower down payment – Qualify with just 3.5% down since these are government-backed loans.

5. Easier to qualify – FHA loans offer more lenient credit and income requirements.

FHA Single Close Construction Loan Requirements

While FHA single close construction loans are easier to get than conventional mortgages, you still need to meet certain eligibility standards. Here are the main requirements:

• Credit score – You’ll need a minimum credit score of 580 to qualify. The higher your score, the better the interest rate.

• **Down payment **- Have at least 3.5% of the purchase price for the down payment.

• Debt-to-income ratio – Your total monthly debt divided by gross monthly income should be less than 43%.

• Homebuyer education – First-time homebuyers must complete an FHA-approved counseling course.

• Occupancy – You must use the property as your primary residence.

In addition to the above, you’ll need to own the land prior to construction or buy it using funds from the loan. The appraised value of the land and completed home must be enough to meet the 96.5% loan-to-value limit that FHA enforces.

How Does the FHA Single Close Construction Loan Process Work?

Now let’s walk through the 6 main steps of getting an FHA single close construction loan:

1. Pre-approval – Get pre-approved for an amount you can comfortably afford. This shows sellers and contractors you’re serious.

2. Purchase land – Buy land with your own funds or use the loan to cover purchase of the lot.

3. Find a contractor – Hire a licensed general contractor to build the home.

**4. Final approval **- Provide all required documents for underwriting to get full approval.

5. Closing & construction – Close on the loan and start construction within 30 days.

6. Completion – Finish construction and occupy the home within 6 months.

The pre-approval, documents submitted during underwriting, property appraisal, and other details will determine your eligibility and the final loan amount approved.

Throughout the construction phase, the lender will order inspections and surveys to ensure work is on schedule and meets all building codes. The loan funds are placed in escrow and released incrementally as certain milestones are met during the build.

Tips for Getting Approved for an FHA Single Close Construction Loan

If you want the best shot at getting your FHA single close construction loan approved, keep these tips in mind:

• Have a down payment saved up – Come prepared with at least 3.5% down. FHA requires this minimum but 20% down is ideal.

• Check your credit – Review your credit reports and fix any errors to boost your score.

• Lower your debt – Pay down balances and consolidate debt before applying to improve your debt-to-income ratio.

• Document income – Have 2 years of employment history and income documentation ready.

• Pick house plans – Have detailed construction plans and specifications for the home you want.

• Research lot costs – Get estimates on land purchase and site development costs in the area.

• Line up a contractor – Find a licensed general contractor to provide a construction bid.

Following these best practices sets you up for success through what can otherwise be an overwhelming loan process.

Alternatives to FHA Single Close Construction Loans

FHA single close construction loans are a smart financing choice for many, but not the only option out there. Here are a few alternatives to consider:

• Conventional construction loans – Offered by private lenders and require higher credit and down payment.

• VA single close construction loans – For veterans and service members who want 0% down financing.

• USDA single close construction loans – For building in rural areas with no down payment.

• Renovation loans like FHA 203(k) – Finance remodeling along with purchase of an existing home.

The right loan type comes down to your budget, location, eligibility qualifications, and goals as a homebuilder. Weigh all these factors as you’re exploring construction loan alternatives.

Everything You Need for Building Your Dream Home

By now you should understand what an FHA single close construction loan is, how it works, and the many benefits it provides as a low down payment government-backed mortgage option. You’ll enjoy the added convenience of wrapping up land purchase, construction, and permanent financing into one loan with a simplified process.

While requirements still exist, FHA single close construction loans offer flexibility that makes building a custom home attainable even with limited funds or lower credit. If you’re ready to start construction on your dream home, connect with one of our expert loan officers today to go over your specific loan options.