Do FHA One-Time Close Mortgages Require a Down Payment?

April 20, 2019

In the past we have reported on One-Time Close Construction (OTC) Loan options for borrowers who wish to buy land (or who already own land) and have a property built for them from the ground up.

There are FHA One-Time Close construction loans, but also USDA and VA One-Time Close construction loans. When you choose the FHA version of the OTC, there are some important differences you should know.

For example, VA construction loans are governed by VA loan rules which include a zero down payment option for qualified borrowers (lender standards will also apply). But with the FHA loan version, there definitely IS a down payment-a minimum of 3.5% of the lesser of the appraised value or the acquisition cost.

HUD 4000.1 states:

The maximum mortgage amount is calculated using the appropriate purchase Loan-to- Value (LTV) percentage of the lesser of the appraised value or the documented Acquisition Cost. The documented Acquisition Cost of the Property includes:

• the builder’s price to build;
• borrower-paid extras over and above the contract specifications and/or out-of- pocket expenses not included in the builder’s price to build;
• cost of the land if already owned, or with an acceptable gift documentation, the appraised value of the land may be used instead of the cost; and
• closing costs associated with any interim financing of the land.        

FHA loan rules say that in cases where the land is purchased from the builder, “the cost must be included in the builder’s to build”. That guidance is found on page 445 of the FHA Single Family Loan Handbook.

Where can the borrower’s down payment come from when it comes to FHA One Time Close construction loans? HUD 4000.1 instructs the lender to accept “any cash investment in the Acquisition Cost of the Property to satisfy the Minimum Required Investment (MRI).” The lender will also be required to properly document the sources of such funds. But that’s not all, according to HUD 4000.1:

“The Mortgagee must document the cash investment was from an acceptable source of funds in accordance with TOTAL or manual underwriting requirements as applicable.The Mortgagee must document the cost and date of purchase of the land, if already owned, by obtaining the Closing Disclosure or similar legal document.” The same applies to any “borrower-paid extras” above and beyond what is specified in the contract.


 FHA, VA, and USDA: One-Time Close Loans

Want More Information About One-Time Close Loans?

We have done extensive research on the FHA (Federal Housing Administration), the VA (Department of Veterans Affairs) and the USDA (United States Department of Agriculture) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
 
FHA.com provides information and connects consumers to qualified One-Time Close lenders in an effort to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
 
Please note that investor guidelines for the FHA, VA, and USDA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs:  Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
 
Your email to [email protected] authorizes FHA.com to share your personal information with a mortgage lender licensed in your area to contact you.

1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines.  Most lenders will go up to $750,000 and review higher loan amounts on a case by case basis.   If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.