Building a new home from the ground up can be an exciting yet complicated process. Traditionally, you would need to secure financing for the land purchase, construction loan, and permanent mortgage in separate steps. This requires multiple loan applications, approvals, and closings. However, a revolutionary loan product called the one step construction loan streamlines the entire journey into one tidy bundle.
As experienced home financing advisors, we want to provide you with all the details about this convenient loan option. A one step construction loan may help you achieve your dream of building a custom residence without all the hassle of typical construction financing
What Exactly is a One Step Construction Loan?
Also known as a single close construction loan or all-in-one loan, the one step construction loan combines interim construction financing and a permanent mortgage into a single loan with one application, one closing, and one monthly payment.
With this loan product, homebuilders can finalize construction plans, qualify for and close on financing, begin construction, and seamlessly transition into a traditional permanent mortgage all through one lender. There’s no need to shop for multiple loans or go through multiple closings.
The one step construction loan gives you financial security throughout the building timeline without having to reapply for financing months down the road.
Top 5 Benefits of One Step Construction Loans
1. Simple Application Process
You only need to complete one loan application and provide documents once to qualify for both the construction financing and permanent mortgage. This saves you considerable time and effort compared to applying separately for a construction loan and permanent home loan
2. Single Closing
One step construction loans involve a single closing versus traditional construction loans that require two separate closings – once for the interim financing and again for the permanent mortgage. With just one closing, you’ll pay lower upfront fees and closing costs.
3. Seamless Transition
Once your new home is move-in ready, the construction loan easily converts to a permanent fixed-rate mortgage with no disruptions or reapprovals needed. The interest rate and term of your permanent financing are locked in upfront.
4. Predictable Payments
With traditional construction loans, your payments fluctuate based on the amount drawn during each stage of construction. The one step construction loan offers consistent principal and interest payments from the moment you close just like a conventional mortgage.
5. Build on Your Schedule
Because financing is secured upfront, you can begin construction on your timeline without worrying about loan approvals down the road. This allows greater flexibility and control over the building schedule.
What Are the Qualification Requirements?
The eligibility criteria for one step construction loans are similar to conventional mortgages used to purchase existing homes:
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Credit Score: Minimum credit scores range from 580 to 640 depending on the loan program. Many programs accept scores as low as 600.
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Downpayment: Downpayments are typically between 3.5% to 5% of the total loan amount depending on the specific loan program. Certain 0% down payment options are available too.
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Debt-to-Income Ratio: Your total monthly debt obligations compared to gross monthly income will be reviewed to ensure you can comfortably afford the new mortgage payment. Debt-to-income ratios up to 50% are often allowed.
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Loan-to-Value Ratio: The loan amount in relation to the completed home value must fall within permitted guidelines, usually 97.75% or less of the home’s value.
As experienced mortgage advisors, we can pre-qualify you for a one step construction loan and match you with a personalized financing solution.
Which Loan Programs Offer One Step Construction Loans?
Several mortgage programs offer construction loan options combined with long-term fixed rate financing in one simplified package:
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FHA One-Time Close Construction Loan – Insured by the Federal Housing Administration, this program offers low down payments around 3.5% and flexible credit and debt-to-income requirements.
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VA One-Time Close Construction Loan – Eligible military service members and veterans can qualify for 0% down payment financing and limited closing costs through the VA loan program.
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USDA Single Close Construction Loan – For homes built in suburban and rural locations, USDA loans offer 0% down payments even on new construction. Credit scores as low as 640 may qualify.
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Conventional 97 Construction Loans – Offered by private lenders, these programs feature 3% to 5% down payments on construction loans that convert to conventional mortgages.
The specific construction loan program that’s best for you depends on your financial situation, credit profile, the property location, and more. Our team can guide you in making the most suitable choice.
What’s the Process of Building a Home with a One Step Construction Loan?
Follow this general sequence if you use a one step construction loan:
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Find a lot and create build plans with a licensed general contractor
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Apply and get pre-approved for financing based on the construction contract
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Close on the land purchase (if needed) and construction loan
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Finalize permits and start build process based on the approved timeline
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Make monthly payments on the loan throughout the building phase
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Complete the project and obtain a certificate of occupancy
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Convert the construction loan into permanent financing once the home is ready to occupy
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Start making normal mortgage payments based on the loan program terms
Throughout the process, you’ll work with real estate professionals, loan officers, inspectors, and your chosen builder to ensure everything goes smoothly from start to finish.
Is a One Step Construction Loan Right for You?
If you’re planning to build a custom home rather than buy an existing house, the streamlined process of a one step construction loan may be ideal for your situation. The combined features allow you to:
- Secure financing upfront before breaking ground
- Avoid having to reapply and close on multiple loans
- Lock in your long-term mortgage rate and terms early on
- Make consistent monthly payments from the initial closing date
- Seamlessly move into the finished home without disruptions
As your advisors, we can determine if you qualify for a one step construction loan, choose the optimal program, and walk you through each step of the process. Our team has years of experience with these unique loans.
We’re happy to answer your questions and discuss whether a one step construction loan is the right fit to turn your vision into reality! Reach out to get the conversation started.
What is a One-Time Close Construction Loan?
Construction loans are temporary loans designed to finance the financial costs of building your own home. They are a separate program than a traditional mortgage. The Construction loan is to cover the specific building costs like materials, labor, land, onsite utilities etc. then you would also need a home loan, like a Conventional loan or an FHA loan to finance the home. In order to get approved for both of these loans, you would generally have to fill out two different applications and pay closings costs on the two separate loans.
A One-Time Close Construction loan combines a traditional construction loan and a mortgage into one loan. This means that you only have to apply once to be approved and only have to pay one set of closing costs.
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.
Construction Loans: What They Are and How They Work (IN DETAIL)
FAQ
Is a one-time close construction loan a good idea?
What is the minimum FICO score for a construction loan?
Why are construction loans hard to get?
What is the minimum credit score for go mortgage?
What is the old national construction loan 1?
Ready to build the home of your dreams? The Old National Construction Loan 1 offers simple, flexible financing. Lock in a fixed rate for your construction period and permanent term, while saving on closing costs. Mortgage lenders can prequalify you for a home loan before you even start. The process is quick and easy with an answer in minutes.
What is a single close construction loan?
With a single close construction loan, you receive both an interim construction loan and a 30-year permanent loan at the same time. You get a single promissory note and one deed of trust. You’ll sign the 30-year amortizing promissory note at closing. Once the promissory note is signed, any liens on the land will be automatically paid off.
Do you qualify for a single close construction loan?
Single close construction loans are made to help simplify the process. Qualifying for a one-time close construction loan is no more complicated than qualifying for a conventional home loan, depending on your overall financial health and risk level. If you’d like to see whether you qualify for a single close construction loan, connect with us.
What is a one-time close construction loan?
A One-Time Close Construction Loan makes funding your new construction home simple. With home prices increasing and inventory so scarce, it can be hard to find a dream home. Even then, a possible bidding war and overpayment are sometimes enough to scare off potential buyers. Instead of searching for your dream home, why not build one instead?
How do construction-to-permanent loans work?
Construction-to-permanent loans function in two phases: construction and post-construction. During the construction phase, the lender authorizes payments, or draws, to cover the cost of land, materials, labor, permits and other expenses. The lender works closely with an inspector to ensure the construction continues on-schedule and on-budget.
Where can I get a construction-to-permanent loan?
Many types of lenders offer construction-to-permanent loans, but you’ll most often find them at a bank or with a lender that specializes in construction financing. What is a construction-to-permanent loan?