Are You Ready for an FHA One-Time Close Construction Loan?

September 15, 2019

There are important things to consider before you start discussing your needs with a participating FHA lender, and coming into this mortgage loan process fully prepared will definitely save you a great deal of time.

Do You Understand the FHA One-Time Close Loan?

FHA construction loans are different in several important ways than existing construction mortgages. The basic definition of an FHA One-Time Close mortgage, also known as a construction to permanent mortgage, is as follows:

“A Construction to Permanent Mortgage combines the features of a construction loan (a short-term interim loan for financing the cost of construction) and the traditional long- term permanent residential Mortgage with a single mortgage closing prior to the start of construction.”

That means that a single application and closing date will apply. But FHA OTC mortgages require building permits and other paperwork depending on the housing market; borrowers are urged to consider the time it takes to obtain the building permits when planning such a mortgage loan with the lender. It’s wise to make sure you can get the permits first before spending money on an architect, purchasing plans, etc.

In addition to that, FHA loan rules have specific requirement for the ownership of the land the new home is to be built upon:

“The Borrower must be purchasing the land at the closing of the construction loan, or have owned the land for six months or less at the date of case number assignment.”

If you haven’t considered the land ownership issue before planning your new FHA OTC loan, this is a key factor to add to your checklist.

One very important way these loans are different is that they require the borrower to hire contractors and other third parties, and payments to those third parties requires the use of escrow.

FHA One-Time Close Construction Loan Rules: FHA Guidelines Versus Lender Requirements

The FHA loan handbook, HUD 4000.1, states that the borrower may be permitted to act as his or her own contractor, but that no cash back to the borrower is permitted outside legitimate expenses and the actual cost of those expenses.

Even though FHA One-Time Close loans technically allow you to do your own work, your participating FHA lender may have rules that do not allow the borrower to do so.

This is a circumstance common for FHA mortgages; the lender is not required to offer all types of FHA mortgages, nor is the lender required to permit the borrower to act as her own general contractor for purposes of building or improving a home.

You may find that certain lenders with certain types of loans are more lenient in this area, such as for FHA Limited 203(k) Rehab loans. But a major construction project may be deemed too much of a risk to allow anything but an FHA-approved third party to do the work.

Talk to your loan officer about these issues and related factors such as the addition of funds for an FHA Energy Efficient Mortgage package that can pay for approved energy-saving add-ons to the home. You have a great deal of options with an FHA One-Time Close construction loan that can help you build your dream home.


 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.