FHA Construction Loans vs. FHA Purchase Loans

September 12, 2022

What makes an FHA One-Time Close construction loan different from a FHA purchase loan? There are important features of each type of loan that you should know about before you commit to either loan type. Are you fully committed to building instead of buying an existing home? Some of the issues below may help you decide which option is right for you.

Are You in a Hurry to Move In?

Constructing a house from the ground up takes time. From the basics like the foundation and installing the roof all the way to which type of fixtures will be installed in the home, there are many decisions to make along the way.

You will need to hire a contractor, apply for permits, and wait for the construction phase of the loan to begin. All these things get you closer to moving into your dream home, but they take time.

Buying existing construction is a better option for those who cannot take the time for these processes. If you need a home immediately, a One-Time Close construction loan may not be for you.

There are other time issues--not all apply in your housing market. Some areas with high demand for construction permits may take longer to approve new applications.

You may not have an issue waiting out the actual construction phase of the loan, but you may need to factor in the waiting period for permits--in a busy market like California permit waiting times may be longer than one month. That’s “on paper” and your actual wait times may vary. It’s smart to ask how long is typical.

Some choose to buy existing construction in housing markets like California because the wait for permits is too long for them.

Down Payment Issues You Should Know

If you buy existing construction with an FHA mortgage, you may be allowed to buy using down payment assistance from a state or local program. These programs are not standardized across the United States, you will need to check your local options to see if you qualify.

Down payment help is typically not an option where a construction loan is concerned. Your participating FHA lender may not approve construction loans for borrowers who need down payment assistance.

Other Things to Remember

Construction loans are similar to FHA existing construction loans when it comes to using escrow. Borrowers are typically required to use escrow for loan-related issues such as paying property taxes.
 
But FHA single-close construction loans also use escrow to pay contractors using loan funds. Permits, materials, labor, and inspections may all be paid through escrow so you should get comfortable with the idea of using it. FHA loan funds for these payments typically do not go through the borrower; they are paid directly from escrow.


 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) and the VA (Department of Veterans Affairs) 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 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 and VA 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, including but not limited to: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes, Dome Homes, Bermed Earth Sheltered Homes, Tiny Homes, Accessory Dwelling Units, or A-Framed Homes.

Contact Us: Send Us Your Request – Spam Safe

Please send your email request to [email protected] which authorizes FHA.com to share your personal information with one 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 $1,000,000 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.