Advantages of the Construction Loan

August 26, 2020

There is a home loan for borrowers who would rather build their home on their own lot instead of purchasing an existing construction house. This is called a One-Time Close (OTC) construction loan and features a single loan application for both the construction of the house and the purchase of it once completed.
 
OTC loans are offered as FHA, VA, and USDA mortgages to first-time borrowers who financially qualify. But they aren’t the only construction loan available; the FHA 203(k) Rehabilitation mortgage (also available as a refinance loan) is also something you can apply for to purchase a fixer-upper home and renovate it.

Construction loans have some advantages you should know about. For example, with the 203(k) Rehab mortgage, the advantage you have is being able to purchase a fixer-upper presumably at a lower price than you would if the home were perfect.

The ability to renovate the property and choose your own color scheme, fixtures and appliances, and other options makes it an attractive option for those who can afford to take a bit longer with their mortgage process to have the home renovated.

And where One Time Close construction mortgages go, the ability to completely design a home from scratch is quite appealing to many borrowers.
 
But what these government-backed construction loans have in common compared to their conventional counterparts? Lower down payment requirements, no penalty for early payoff of the mortgage, and you may be offered a lower interest rate than for the conventional loan equivalent.

When building from the ground up, you will have many choices to make with an architect, floor plans, construction timelines, and other concerns. But what you won’t have to worry about is what surprises the previous owner has left behind--is there a moisture problem in the basement? A roof leak? You won’t deal with any age-related issues with a home that is brand new.

Construction loans backed by the FHA, VA, and USDA are intended for borrowers who are trying to get into affordable homes.

One restriction you may find with some participating lenders is that down payment assistance is not accepted for construction loans, and there may be an elevated FICO score requirement with some lenders depending on circumstances.

The good news is that you can call the FHA at their toll-free number directly to request a referral to a local, HUD-approved housing counselor. Make an appointment with the counselor and explain that you want a construction loan, you’re concerned about the credit requirements, and that you want to know how to prepare your credit and budget for such a mortgage loan.

 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.