FHA One-Time Close Construction Loan
Is a FHA One Time Close Construction Loan right for you?
Two isn’t always better than one. Let me explain.
If you’re building your house from the ground up, you’ll most likely take a construction loan followed by a permanent loan. This scenario will require you to have 2 loans, which means you’ll have 2 start dates and 2 closing dates—which means you’ll pay for 2 separate closing costs!
An FHA one-time close construction loan, however, will allow you to have your home built and financed just under one loan. It’s simpler and more cost-efficient and you end up with a FHA Loan with a 30 year fixed rate when all is said and done.
First, let’s dissect the term “FHA One-Time Close Construction Loan.”
FHA stands for Federal Housing Administration. An FHA loan is a mortgage issued by an FHA-approved lender and insured by the FHA. FHA loans are designed for low-to-moderate income borrowers and require lower minimum down payments and credit scores than many conventional loans.
A construction loan (also known as a “self-build loan”) is a short-term loan used to finance the building of a home or another real estate project. Construction loans are only for buying land and building structures or for improvements. Once construction is finished, you need to pay off the construction loan, which most people will replace with a loan that looks more like a standard mortgage which you will pay over a number of years.
A one-time close loan is a type of mortgage that is available for those who are building a house. This loan allows you to get both loans (the construction loan and the permanent loan) at once. When construction is completed, your loan becomes a traditional mortgage.
Advantages of an FHA One-Time Close Construction Loan
If you like “one-stop-shopping,” the FHA one-time close construction loan will be attractive for you.
- It means only one application. You only have to go through the process once.
- It means only one closing. Multiple closings mean higher costs. The cost difference might not be dramatic, but still a penny saved is a penny earned.
- Some lenders will allow you to add interest costs (during the construction phase) to your permanent loan, making it easier for you to make payments while waiting for your home to be finished.
- It gives you added security. With a one-time close loan, in the event you lose your job during the construction phase, you still get permanent financing. If this happens with a regular construction loan, you might have a hard time convincing a lender to approve your next loan while you’re between jobs.
- You can lock in a rate if you think rates will increase during construction phase. You’ll also be able to plan your budget better since you can calculate and budget for monthly payments in advance.
The Disadvantages of a FHA One Time Close Construction Loan
- One-time close FHA loans probably come with slightly higher interest rates. However, the benefit is you lower your risk, and you have the convenience of one closing. If you want to pay for convenience, this loan might be for you.
- You’re not as flexible. If you keep your permanent loan separate, it means you have the freedom to apply for a loan from anywhere, for any kind of loan, instead of being tied down to one mortgage lender. But you have twice the closing costs and risk not qualifying for the second after construction is done.
What are the Requirements to Qualify for a FHA One Time Close Construction Loan?
In order to qualify for a FHA One Time Close Construction Loan, you must meet the following guidelines:
- A minimum middle FICO score of 620 for all borrowers
- The New Home MUST Be your Primary Residence
- Minimum Investment is 3.5% of the purchase price
- Must be a Stick Built or Modular Home in order to qualify
- Closing Occurs before construction begins
- Closing Costs Can be financed into the FHA Loan
- No Payments on Mortgage Loan till after receive Certificate of Occupancy.
What are Non-Allowable Properties for OTC Construction Loans?
The following home property types are excluded from the FHA One Time Close Construction Loan Program, meaning that you won’t be able to use the One-Time Close loan for financing:
Steel framing kits for metal buildings that are assembled on site.
Metal structures that combine living quarters with traditional barn space.
Log Cabin Homes
Pre-cut kits for log buildings that are assembled on site.
Shipping Container Homes
A dwelling made from a steel container otherwise used for shipping
Houses raised on piles over land or a body of water.
Solar Only or Wind Only Powered Homes
Homes that are powered on-site solely by solar panels or solely by wind turbines.
Homes made in the shape of a sphere utilizing shell framework.
Bermed Earth Sheltered Homes
Homes with earth (soil) against the walls, roof or buried underground.
Homes that are 600 square feet or less.
Accessory Dwelling Units
Additional living quarters that are independent of the primary dwelling.
Building with a tall triangular roof that resembles the letter A.
The primary reason for these exclusions is that all non-regular homes are considered unique properties and hard to get comps for under VA and FHA. These homes require specialized construction techniques, making it even more important that a single builder starts and finishes a project. If the builder were to quit before a job is finished, the lender would need to step in and find a replacement. This can be more difficult than usual due to the specific nature of the work.
How Do I Apply for a FHA One Time Close Construction Loan?
If you’re not sure if an FHA one-time close construction loan is the best step to take, please contact me on 302-703-0727 or APPLY ONLINE and we’ll figure out your best mortgage loan option together.
John R. Thomas – NMLS 38783
Certified Mortgage Planner – Primary Residential Mortgage, Inc.
302-703-0727 DE Office / 610-906-3109 PA Office / 410-412-3319 MD Office
248 E Chestnut Hill Rd, Newark, DE 19713