Complete Guide to FHA One-Time Close Construction Loans

By: ROS Team

Building a home is an exciting endeavor, but navigating the financial aspects can be overwhelming. Fortunately, there are financing options designed specifically for home construction, such as the FHA One Time Close Construction Loan.

This comprehensive guide will provide you with a deep understanding of the FHA construction loan, its benefits, eligibility requirements, and the step-by-step process involved.

What Is FHA One Time Close Construction Loan?

FHA One Time Close Loans are a type of mortgage loan program offered by the Federal Housing Administration (FHA) that combines the financing for home construction and permanent mortgage into a single loan.

This means that borrowers only have to go through one application and approval process, making it a convenient option for those looking to build a new home.

Benefits of FHA One-Time Close Construction Loans

FHA Construction Loan offers several benefits to borrowers who are looking to build their own homes.

Some of the key advantages include:

1. Consolidated Financing:

Unlike traditional construction loans, FHA One Time Close Construction Loans combine the construction loan and permanent mortgage into a single loan.

This simplifies the financing process by eliminating the need for two separate loan applications and approvals.

2. Streamlined Application and Approval Process:

With FHA One Time Close Construction Loans, borrowers only need to go through one application and approval process.

This saves time and reduces paperwork compared to obtaining separate construction and mortgage loans.

3. Lower Down Payment Requirements:

FHA loans generally have lower down payment requirements compared to conventional loans. This makes it more accessible for borrowers who may not have substantial savings for a large down payment.

4. Fixed Interest Rates:

FHA One Time Close Loans offer fixed interest rates, providing borrowers with stability and predictability in their mortgage payments. This can be advantageous, especially in a rising interest rate environment.

5. Extended Rate Lock Options:

These loans often provide options for an extended rate lock, allowing borrowers to secure a favorable interest rate during the construction phase and throughout the loan process. This protects against potential interest rate increases during the construction period.

6. Flexibility in Property Types and Construction Projects:

FHA One-Time Close Loans are available for various property types, including single-family homes, multi-unit properties, and manufactured homes. They also accommodate a range of construction projects, such as new construction, renovations, and additions.

Eligibility & Qualifications

To qualify for an FHA One Time Close Construction Loan, borrowers must meet specific eligibility requirements and qualifications, which are similar to those for a standard FHA loan.

Here are the key criteria to consider:

1- Credit Score Requirements:

Borrowers will need to meet the minimum credit score requirements set by the FHA. Typically, a credit score of 580 or higher is required to qualify for a 3.5% down payment.

If your credit score is below 580, a higher down payment of 10% may be necessary. It’s important to review the FHA credit requirements for more detailed information on credit score qualifications.

2- Primary Residence:

The home is constructed with an FHA One Time Close Construction Loan and must be intended as the borrower’s primary residence. This means it should be the place where the borrower resides for the majority of the year.

3- Work History and Income:

Lenders will typically require borrowers to have a minimum two-year work history, demonstrating stable and consistent income. This helps establish the borrower’s ability to repay the loan. Income requirements may vary between lenders.

4- Debt-to-Income Ratio:

Most lenders will assess the borrower’s debt-to-income ratio, which compares the borrower’s monthly debt obligations to their gross monthly income. Generally, the maximum debt-to-income ratio allowed is 43% for most lenders, although some lenders may accept ratios of up to 50%.

5- Bankruptcy and Foreclosure History:

Borrowers should not have had a bankruptcy within the past two years or a foreclosure within the past three years. Meeting these requirements demonstrates financial stability and responsibility.

6- Mortgage Insurance Premiums:

Borrowers should be prepared to pay both an upfront mortgage insurance premium (UFMIP) at closing and a monthly mortgage insurance premium (MIP) throughout the life of the loan. These premiums are required for FHA loans and help protect the lender in case of default.

Are FHA 203K Loan And The One Time Close Construction Loan Same?

No, both these loans are different. The FHA 203k loan is for purchasing or refinancing properties needing repairs or renovations, while the FHA One Time Close Construction Loan is for building new homes.

The 203k loan combines purchase/refinance and repair costs, while the One Time Close loan combines construction and permanent mortgage financing. Loan limits vary, and specific requirements depend on lender’s and borrowers qualifications.

When is an FHA One-Time Close Construction Loan a Good Option?

The FHA One Time Close Construction Loan is a good option for borrowers who want to build a new home from scratch. It is beneficial when you want to simplify the financing process by combining the construction loan and permanent mortgage into one loan.

This loan is suitable for those who prefer the convenience of a single application and approval process, lower down payment requirements, fixed interest rates, and flexibility in property types and construction projects.

FHA One-Time Close Construction Loan: Final Thoughts

The FHA One Time Close Construction Loan offers a streamlined and convenient financing option for individuals looking to build their dream homes. With eligibility requirements and qualifications similar to standard FHA loans, this comprehensive guide has equipped you with the knowledge to navigate the loan process successfully.