One-time Close Mortgages Compared To Rehabilitation Loans

What is the difference between a one-time close construction loan and a rehabilitation loan like the Fannie Mae Homestyle Renovation Loan, or an FHA 203(k)? 

These loans feature a single application and loan closing date, both allow the payment of loan funds from escrow to contractors, and participating lenders may require the borrower to typically credit-qualify with FICO scores typically in the mid-600s for either type of mortgage in order to secure the best rates and terms.

Basic Differences

But what are the differences between these loans? Are they interchangeable? The short answer is no--the FHA 203(k) Rehabilitation mortgage can be applied for as either a refinance or a purchase loan where One-Time Close construction loans are typically forward mortgages only.  Fannie Mae Homestyle loans only allow you to borrow a certain percentage of the "after repairs" value of the propertly.

Those are some basic differences. Rehab loans are typically for existing structures, and while you may be allowed to use such loan funds to do major work on load-bearing walls, you generally cannot build a brand new dwelling with one. 

They are typically offered to modify one-to-four unit properties, rather than building one from the ground up.

One-Time Close Loans Are For New Construction

One-Time Close construction loans, on the other hand, are strictly for building a new-construction home from scratch. Any structure on the land where the construction loan is intended would likely be demolished and removed. 

It would not be modified as part of the building project the way it would be under an FHA 203(k) rehab loan. (We’re not talking about outbuildings here, but rather any structure that would be replaced by the new home.)

Some things about One-Time Close loans ARE similar to loans like the FHA 203(k) Rehabilitation Mortgage. One is the use of escrow. You’ll find escrow is required in typical cases. The borrower is not permitted unrestricted cash back at closing time, and escrow is typically used to purchase materials, pay contractors, taxes, and other expenses of the loan.

 Mortgage Insurance

Mortgage insurance is required for these loans. Conventional construction loans may require a 20% down payment to avoid mortgage insurance, FHA construction loans require it for either 11 years or the full lifetime of the loan depending on the loan, the loan term you choose, and other variables.

Both loans will require a down payment, and both will require inspections at the end of the construction project to ensure the work meets FHA standards as well as state/local code. And both loans do feature the possibility of another credit check before closing day. You’ll want to treat these loans the same as any other type of mortgage--don’t apply for new credit or make major job changes like starting your own business before loan closing day.

If you do, you risk the lender having to re-qualify you for the mortgage. There are no guarantees of the outcome if this is necessary. It’s smart to wait on such issues until you have gotten beyond your closing date and have the keys to your new home in hand.

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 with 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.

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

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 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 $1,500,000 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.