Demystifying The One Time Close Loan: A Complete Guide

If you’re looking to build or purchase a new home, financing the project can seem daunting Traditional construction loans require two separate loan closings – one for the construction financing and another for the permanent mortgage. This means extra paperwork, underwriting, and closing costs That’s why the one time close loan is gaining popularity. With a one time close loan, you complete just one closing for both construction and your permanent home loan.

In this comprehensive guide, we’ll explain everything you need to know about one time close mortgages, also called all-in-one loans or single close loans. Here’s what we’ll cover:

• What is a one time close loan?
• Pros and cons
• Eligibility requirements
• The step-by-step process
• Costs involved
• Finding the right lender
• What to watch out for

Let’s get started!

What Is A One Time Close Loan?

A one time close loan combines your construction loan and permanent mortgage into a single loan with just one closing. Rather than getting a short-term construction loan that you later refinance into a regular home loan, the one time close loan handles everything upfront.

Here’s a quick rundown of how it works:

• You close on the loan once before construction starts
• Loan funds are dispersed in draws throughout the build process
• Once construction is finished, the loan converts to a permanent mortgage
• You make one monthly payment for the life of the loan

One time close loans are available through government programs like FHA and VA as well as private lenders. They provide an efficient process for financing construction and buying or building a home.

The Pros Of One Time Close Loans

There are many advantages to this streamlined construction financing option:

One closing: Avoid going through the loan process twice with a separate construction loan and permanent mortgage. Save significantly on closing costs.

Lower upfront costs: Only one set of origination fees and other closing costs.

Single draw schedule: Structured payments are issued at major construction milestones.

Convert to permanent loan: Loan transitions to fixed-rate mortgage once home is completed.

Often lower rates: May offer better rates than other construction/home loan combinations.

Easier to qualify: Single loan approval process with one debt-to-income calculation.

The Potential Cons

While very appealing, one time close loans aren’t perfect. Here are a few potential downsides:

Higher upfront fees: May have higher origination fees than a typical mortgage.

More complex process: More Moving parts involved like inspections, draw schedules, and builders.

Variable rates: Interest rates fluctuate during construction period.

Tighter approval: Income, credit, and assets closely scrutinized.

Shorter terms: Often max out at 30-year loan term.

Limited availability: Not offered by all lenders and in all areas.

Eligibility Requirements

While eligibility varies by lender, here are some common requirements to qualify for a one time close loan:

• Good credit (620+ FICO score)
• Stable income and employment
• Lower debt-to-income ratio (often below 45%)
• Sufficient assets and cash reserves
• Loan-to-value ratio 90% or less
• No recent bankruptcy or foreclosure
• Loan amount below conforming limits
• Single family home construction

Meeting these guidelines ensures you’re a low credit risk for financing. Rental properties, vacation homes, and multifamily housing are not eligible.

How The One Time Close Loan Process Works

If you decide this loan product fits your needs, here’s a high-level look at the process:

Find land to purchase (if needed)

Select a qualified builder

Choose lender and apply for loan

Get loan approval

Close on loan

Start construction – draws are issued

Home completion and final inspection

Loan converts to permanent mortgage

Having a trusted real estate agent and builder on your team is key. The lender will manage the structured draw payments and facilitate converting to the final mortgage.

Closing Costs And Fees

A one time close loan consolidate costs, but you’ll still have expenses such as:

• Origination fees
• Appraisal fee
• Credit report charges
• Title fees
• Survey/soil test costs
• Inspection fees
• Initial escrow deposit
• Points/discount fees

You’ll likely pay higher origination fees but save on multiple appraisals, applications, processing and underwriting. Shop lenders and compare total costs.

Finding The Right One Time Close Lender

The key is finding an experienced lender that offers one time close loans. Look for:

• Extensive construction lending expertise
• Competitive rates and costs
• Strong customer service reputation
• Reasonable construction draw requirements
• Willingness to work with your builder

Ask trusted real estate and home building professionals for recommendations. Compare options from national lenders, local banks, credit unions, and online lenders.

What To Watch Out For

While one time close loans simplify the process, it’s still complex. Be aware of these key considerations:

• The builder’s credentials and financial health

• Limitations with the construction property

• Restrictions on types of homes that can be built

• Contingencies if the builder fails to finish the home

• Interest rate fluctuations during construction

• Changes to loan terms if construction goes beyond schedule

Is A One Time Close Loan Right For You?

If you want to build or buy a newly constructed home, a one time close loan offers an efficient financing solution. But make sure to weigh the pros and cons and shop multiple lenders before committing. With the right loan and the right team, you’ll be moving into your brand new dream home before you know it!