One-Time Construction Loans

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🔹Introduction to One-Time Close Construction Loans 

A One-Time Close (OTC) Construction Loans provides homebuyers and builders with a streamlined financing solution for constructing a new home. These loans eliminate the need for multiple closings and simplify the financing process. Both Fannie Mae and Freddie Mac offer OTC construction loan programs designed to support homebuyers, builders, and lenders by reducing costs, providing flexibility, and improving loan accessibility.

While both programs share similar objectives, the key differences are Freddie Mac CHOICERenovation is 3% minimum down payment, 30-year term only and includes their renovation loans along with new construction where Fannie Mae HomeStyle is 5% minimum down payment, available in both 15 and 30-year term, and is only for traditional new home construction. 

🔹What Is a One-Time Close Construction Loan?

A One-Time Close Construction Loan is a type of mortgage that combines the financing for both the construction and permanent mortgage into a single loan. Unlike traditional construction loans, which require multiple loans and closings, the OTC loan simplifies the process by eliminating the need for a second approval and closing. This reduces costs, administrative tasks, and risk for both lenders and borrowers.

🔹Fannie Mae's One-Time Close Construction Loan:

➡️ Key Features:

✅ Single Closing: The borrower only needs to close once, covering both the construction phase and permanent mortgage.

✅ Flexible Down Payment: As low as 5% down for owner-occupied primary residences.

✅ Interest-Only Payments: During construction, borrowers make interest-only payments on funds that have been drawn.

✅ Permanent Financing: Converts to a standard mortgage (fixed or adjustable rate) after construction is completed.

✅ Loan Terms: Available in 15- and 30-year fixed-rate terms or ARMs.

✅ Eligible Properties: 1-4 unit primary residences, second homes, and investment properties.

✅ Credit Requirements: Minimum credit score of 620.

✅ Builder Requirements: Licensed contractor required; self-builds are typically not allowed.

✅ Loan Limits: Conforming loan limits apply, but higher loan amounts may be possible with jumbo financing options.

🔹Freddie Mac's One-Time Close Construction Loan: "CHOICERenovation® and CHOICEReno eXPress"

➡️ Key Features:

✅ Single Close Process: Merges construction financing with a long-term mortgage in one closing.

✅ Low Down Payment Options: As low as 3% down for qualified borrowers.

✅ Flexible Loan Terms: Available as a 30-year fixed or adjustable-rate mortgage (ARM).

✅ Eligible Properties: 1-4 unit primary residences, second homes, and investment properties.

✅ Credit Requirements: Minimum credit score of 620.

✅ Builder Requirements: Contractor must be licensed and approved.

✅ Loan Limits: Subject to Freddie Mac’s conforming loan limits, with jumbo options available.

➡️ Benefits of a One-Time Close Construction Loan:

✅ Single Closing Process – Reduces closing costs and paperwork.

✅ Lower Risk of Changing Interest Rates – Since the loan is closed before construction begins, the rate is locked in advance.

✅ Convenient Loan Management – One loan for the entire construction and mortgage phase.

✅ Flexible Property Types – Financing available for primary residences, second homes, and investment properties.

✅ Interest-Only Payments During Construction – Borrowers make lower payments during the building phase.

➡️ To qualify for either Fannie Mae or Freddie Mac’s One-Time Close Construction Loan, borrowers generally need:

✅ Good Credit: Minimum credit score of 620.

✅ Stable Income & Employment: Verification of income and employment history.

✅ Down Payment & Reserves: At least 3-5% down, plus reserves depending on the lender’s requirements.

✅ Approved Builder: Must work with a licensed and approved contractor.

✅ Debt-to-Income Ratio (DTI): Typically, 43% or lower, but exceptions may be made.

Both Fannie Mae HomeStyle® Construction and Freddie Mac CHOICERenovation® loans offer excellent solutions for borrowers looking to finance new home construction with a streamlined process. While they share many similarities, Freddie Mac’s loan may be more flexible in terms of renovation financing, whereas Fannie Mae’s program is often preferred for traditional new builds.

🔹FHA One-Time Close Construction

FHA One-Time Close (OTC) Construction Loans provide a unique financing solution for borrowers looking to build a new home while benefiting from the advantages of an FHA-backed loan. This loan combines the construction financing and permanent mortgage into a single loan, simplifying the process and making home construction more accessible, especially for borrowers with lower credit scores or smaller down payments.

➡️ Key Features:

✅ Single Closing: A single loan covers both the construction and the permanent mortgage phases.

✅ Low Down Payment: As low as 3.5% down, making it accessible for more borrowers.

✅ Credit Score Flexibility: Minimum credit score requirement is 580, though some lenders may require a higher score.

✅ Fixed Interest Rate: The permanent mortgage rate is locked in at closing, protecting against fluctuations.

✅ Government-Backed Security: Since the FHA insures the loan, it provides additional security for lenders and potentially lower rates for borrowers.

✅ Builder Requirements: Must work with an FHA-approved contractor.

✅ Property Type: Only primary residences are eligible.

✅ Loan Limits: Subject to FHA loan limits, which vary by location.

➡️ Benefits of FHA One-Time Close Construction Loan:

✅ Easier Qualification – With a lower credit score requirement and smaller down payment, this loan is ideal for borrowers who may not qualify for conventional construction loans.

✅ Fixed-Rate Stability – Borrowers lock in their mortgage rate upfront, protecting against interest rate increases during construction.

✅ Government-Backed Loan – The FHA’s backing reduces lender risk, often leading to better interest better interest better interest rates and more lenient qualification standards.

✅ No Multiple Closings – Unlike traditional construction loans that require a separate mortgage upon completion, this loan automatically converts to a permanent FHA loan.

✅ Lower Closing Costs – A single closing means reduced closing fees compared to multiple-loan construction financing.

➡️ What is Needed to Qualify for an FHA One-Time Close Construction Loan:

✅ Minimum Credit Score: 580 (some lenders may require 620+).

✅ Debt-to-Income Ratio (DTI): Typically, 43% or lower (exceptions may be made to 50% for strong compensating factors).

✅ Down payment: 3.5% minimum, which can be gifted from a family member.

✅ Stable Income & Employment: Borrowers must demonstrate steady income and employment history.

✅ Property Type: Must be a primary residence (no second homes or investment properties).

✅ Approved Builder: Home must be built by an FHA-approved contractor.

➡️ The differences Between FHA One-Time Close, HomeStyle® Construction, and CHOICERenovation®:

✅ Minimum Down Payment:

• FHA One-Time Close: 3.5%
• Fannie Mae HomeStyle® Construction: 5%
• Freddie Mac CHOICERenovation®: 3%

✅ Eligible Properties:

• FHA One-Time Close: Primary residences only
• Fannie Mae HomeStyle® Construction: Primary, second homes, and investment properties
• Freddie Mac CHOICERenovation®: Primary, second homes, and investment properties

✅ Credit Score Requirement:

• FHA One-Time Close: 580+
• Fannie Mae HomeStyle® Construction: 620+
• Freddie Mac CHOICERenovation®: 620+

✅ Interest Rate:

• FHA One-Time Close: Fixed-rate only
• Fannie Mae HomeStyle® Construction: Fixed or adjustable-rate (ARM)
• Freddie Mac CHOICERenovation®: Fixed or adjustable-rate (ARM)

✅ Builder Requirements:

• FHA One-Time Close: Must be FHA-approved
• Fannie Mae HomeStyle® Construction: Licensed contractor required
• Freddie Mac CHOICERenovation®: Licensed contractor required

✅ Loan Limits:

• FHA One-Time Close: FHA loan limits apply (varies by county)
• Fannie Mae HomeStyle® Construction: Conforming loan limits apply
• Freddie Mac CHOICERenovation®: Conforming loan limits apply0

✅ Best For:

• FHA One-Time Close: Borrowers with lower credit scores and smaller down payments
• Fannie Mae HomeStyle® Construction: Borrowers looking for flexibility in property types and loan structure
• Freddie Mac CHOICERenovation®: Borrowers wanting a combination of new construction and renovations

🔹Is an FHA One-Time Close Loan Right for You?

This loan is a great option for first-time homebuyers, borrowers with limited funds for a down payment, and those with lower credit scores. However, it does come with limitations, such as stricter property requirements and FHA loan limits. If you need more flexibility in property types or loan structure, Fannie Mae HomeStyle® Construction or Freddie Mac CHOICERenovation® may be better alternatives.

🔹Conclusion

The FHA One-Time Close Construction Loan is an excellent choice for borrowers looking to finance new home construction with a low-down payment and flexible credit requirements. Compared to Fannie Mae HomeStyle® Construction and Freddie Mac CHOICERenovation®, it offers easier qualification but is limited to primary residences and FHA loan limits.

Before choosing a loan, it’s essential to evaluate your financial situation, construction goals, and property eligibility. Consulting with an experienced mortgage professional can help determine which loan best meets your needs. Reach out today to learn more about your construction financing options!