Pros and Cons of One-Time Close Construction Loans

August 4, 2024

When you need to finance the construction of a brand new home, you should consider the basic loan options available: single-close construction loans and two-close construction loans.

Each loan type carries distinct benefits and drawbacks, so understanding the key differences is crucial before choosing.

Beyond this, you have choices related to the type of construction loan you seek, whether FHA, conventional, or VA.

One-Time Close Construction Loans

• With a single-close construction loan, you get the entire loan amount upfront in escrow.
• Upon completion, the loan becomes a permanent mortgage. 
• These loans require a larger down payment than existing construction mortgages, typically 10% to 20%, depending on several variables, including borrower credit scores.
• Depending on circumstances, These loans may have higher interest rates than two-close loans.
• Options are typically limited to single-unit homes
• Owner occupancy is a requirement in typical cases

Two-Close Construction Loans

In a two-close construction loan, you should expect to receive an initial loan amount (paid at the beginning of construction) and a second loan amount upon the project's completion.

Typically, interest-only payments are made on the initial loan amount during the construction phase. When construction is complete, you will make principal and interest payments on the combined loan amount.

This option may include a lower down payment requirement, interest rates, and a simpler underwriting process. These mortgages may also offer added flexibility in case of construction delays.

The drawback? The two-step closing process potentially increases expenses and time consumption. You should also anticipate a balloon payment due at the end of the construction phase.

FHA Construction Loans

Interested in an FHA construction loan? Applicants with lower FICO scores may benefit from as these loans. They offer competitive down payments, accommodating underwriting guidelines, and the ability to finance the purchase of land in addition to the home's construction.

VA Construction Loans

VA construction loans, guaranteed by the Department of Veterans Affairs, are offered to qualifying active duty, veterans and qualifying surviving spouses.

VA construction loans feature no VA-required down payment requirement, competitive interest rates, and applicability for financing the purchase of land and construction of a new home.

Making Comparisons

Comparing conventional construction options to their VA and FHA equivalents, conventional loans typically require higher FICO scores and larger down payments than government-backed loans from the VA and FHA.

Conventional loans don’t necessarily feature the same consumer protections as government-backed loans, and depending on the fine print, you may be liable for an early payoff penalty if you sell or refinance a home purchased with a conventional mortgage.

Conventional loans may offer options for higher loan amounts, different construction timelines, and acceptable properties. In some areas, they have fewer restrictions than VA or FHA construction loans.

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 $1,500,000 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.