Which Construction Loan Option Is Right For You?
March 1, 2024
Building your dream house using a One-Time Close (OTC) construction loan is one option among many.
But there are reasons why people don’t choose some of the other options. For example, an owner-builder loan offered by some banks allows the borrower to be their own contractor and do the construction work themselves.
But only some are cut out to handle such a massive undertaking. There are other options. We examine some of them below to learn why One-Time Close loans are popular with so many who want to build rather than buy.
Owner-Builder Construction Loan
An owner-builder loan is a mortgage for the borrower who wants to be their own general contractor.
The caveat here is that a lender will likely require you to have experience as a builder or credentials as a licensed builder for such loans to be approved. You likely won’t be approved for an owner-builder loan if you are a newcomer to construction.
Do One-Time Close mortgages allow you to be your own builder? Typically not. Lender requirements in this area can be stringent.
Construction-Only Home Loans
Construction loans, known as "two-close" mortgages, are offered to those without issues wading through two applications, two closing dates, and two sets of closing costs to pay for.
A borrower who worries their credit may not be good enough to be approved for a single loan application should not apply for a construction-only or two-close loan.
Well-qualified borrowers who fully understand the process are the best candidates for this loan, but the One-Time Close alternative is a better option for many.
One-Time Close Construction Loans
FHA, VA, and conventional lenders offer build-on-your-own-lot One-Time Close construction-to-permanent loans. OTC loans have only one credit check, application, closing day, and a single group of closing costs to pay for.
When the construction project ends, the OTC loan converts to your mortgage. These are typically 30-year fixed-rate mortgages.
FHA OTC loans and conventional equivalents require mortgage insurance, and you may be required to use escrow for both the construction phase and property tax payments.
Renovation Loans: An Alternative To Construction Loans
No, a renovation loan cannot be used to build a home from the ground up. But it’s an option some consider an alternative to building from scratch. Renovate your existing home or build new?
Much depends on the expense related to renovating. Do you need a roof replacement? A major upgrade to the systems in an older home? Building may make more sense based on budgets and timelines.
Ask Your Lender About One-Time Close Mortgages
Due to the nature of construction loans, you can’t move into your house in the same time frame as you would use for a purchase loan. And that may mean your payments are different from a purchase loan during the construction phase, too. Will your payments be delayed? Will they be interest-only payments until you move in?
Ask the lender when your mortgage payments must begin and whether or not they are full payments.
Want More Information About One-Time Close Loans?
We have extensively researched 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 with the guidelines for their products. We can connect you with mortgage loan officers who work for lenders who 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.
OneTimeClose.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 allow 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.
Contact Us: Send Us Your Request – Spam Safe - FHA / VA One-Time Close
Please send your email request to [email protected] which authorizes OneTimeClose.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 is an eligible veteran, 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 VA lenders will go up to $1,500,000 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.
But there are reasons why people don’t choose some of the other options. For example, an owner-builder loan offered by some banks allows the borrower to be their own contractor and do the construction work themselves.
But only some are cut out to handle such a massive undertaking. There are other options. We examine some of them below to learn why One-Time Close loans are popular with so many who want to build rather than buy.
Owner-Builder Construction Loan
An owner-builder loan is a mortgage for the borrower who wants to be their own general contractor.
The caveat here is that a lender will likely require you to have experience as a builder or credentials as a licensed builder for such loans to be approved. You likely won’t be approved for an owner-builder loan if you are a newcomer to construction.
Do One-Time Close mortgages allow you to be your own builder? Typically not. Lender requirements in this area can be stringent.
Construction-Only Home Loans
Construction loans, known as "two-close" mortgages, are offered to those without issues wading through two applications, two closing dates, and two sets of closing costs to pay for.
A borrower who worries their credit may not be good enough to be approved for a single loan application should not apply for a construction-only or two-close loan.
Well-qualified borrowers who fully understand the process are the best candidates for this loan, but the One-Time Close alternative is a better option for many.
One-Time Close Construction Loans
FHA, VA, and conventional lenders offer build-on-your-own-lot One-Time Close construction-to-permanent loans. OTC loans have only one credit check, application, closing day, and a single group of closing costs to pay for.
When the construction project ends, the OTC loan converts to your mortgage. These are typically 30-year fixed-rate mortgages.
FHA OTC loans and conventional equivalents require mortgage insurance, and you may be required to use escrow for both the construction phase and property tax payments.
Renovation Loans: An Alternative To Construction Loans
No, a renovation loan cannot be used to build a home from the ground up. But it’s an option some consider an alternative to building from scratch. Renovate your existing home or build new?
Much depends on the expense related to renovating. Do you need a roof replacement? A major upgrade to the systems in an older home? Building may make more sense based on budgets and timelines.
Ask Your Lender About One-Time Close Mortgages
Due to the nature of construction loans, you can’t move into your house in the same time frame as you would use for a purchase loan. And that may mean your payments are different from a purchase loan during the construction phase, too. Will your payments be delayed? Will they be interest-only payments until you move in?
Ask the lender when your mortgage payments must begin and whether or not they are full payments.
Want More Information About One-Time Close Loans?
We have extensively researched 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 with the guidelines for their products. We can connect you with mortgage loan officers who work for lenders who 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.
OneTimeClose.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 allow 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.
Contact Us: Send Us Your Request – Spam Safe - FHA / VA One-Time Close
Please send your email request to [email protected] which authorizes OneTimeClose.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 is an eligible veteran, 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 VA lenders will go up to $1,500,000 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.
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