01What is a One-Time Close construction loan?
A One-Time Close (OTC) Construction Loan is a specialized financing option that combines your construction loan and permanent mortgage into a single transaction. Instead of going through two separate closings, one for construction and another to convert to a permanent mortgage, you close once, lock your rate, and start building.
The traditional way: two separate loans
Traditionally, building a home required two separate loans and two separate closings:
- First: A Construction Loan. A short-term loan (usually 12 months) to fund the building process. These typically have higher interest rates, require interest-only payments during construction, and you pay closing costs.
- Then: A Permanent Mortgage. Once construction is complete, you must apply for and close on a completely new mortgage to pay off the construction loan. This means re-qualifying with updated income, credit, and employment verification, plus paying a second set of closing costs.
The problem? You're exposed to interest rate risk. If rates rise during your 12-month build, your permanent mortgage could be significantly more expensive than you planned. You also have no guarantee you'll qualify for the second loan. Job changes, credit issues, or other life events during construction could derail your financing.
The better way: One-Time Close
A One-Time Close loan eliminates these risks by combining both loans into a single transaction:
- One Closing, One Set of Fees: You only pay closing costs once, potentially saving thousands of dollars.
- Rate Lock Protection: Your interest rate is locked at closing (before construction begins), protecting you from rate increases during the build.
- No Re-Qualification: Once approved, you don't have to re-qualify when construction is complete. No stress about job changes or credit fluctuations.
- Simplified Process: One application, one approval, one closing. Less paperwork and stress.
- Guaranteed Permanent Financing: You know exactly what your mortgage payment will be before you break ground.
How it works
During construction, funds are disbursed to your builder in stages called "draws" as work is completed. A third-party administrator manages these funds and inspects the progress before each draw is released. This oversight protects you by ensuring your builder only gets paid for completed work. Once construction is complete, your loan automatically converts to permanent financing. You simply sign a modification agreement and your regular mortgage payments begin. No second closing required.
02Who can benefit from an OTC loan?
One-Time Close Construction Loans aren't just for people building custom mansions. They're designed for everyday Americans who want to build a home that fits their needs, whether that's a starter home, a forever home, or something in between.
Ideal candidates include
- Veterans and Active-Duty Service Members: VA OTC loans offer 0% down payment and no PMI.
- First-Time Homebuyers: FHA OTC loans allow credit scores as low as 650 with just 3.5% down.
- Homeowners with Land: If you already own a lot, you can refinance it into the construction loan.
- Rural Property Buyers: Building may be your best option when inventory is limited.
- Buyers Seeking Customization: Get exactly what you want instead of compromising on existing homes.
- Multi-Unit Families: Build a 2-4 unit property and live in one unit (VA and Conventional).
Property types allowed
Single-family homes, 2 to 4 unit properties, barndominiums, manufactured homes and modular homes can all be built with a One-Time Close loan. Chapter 3 walks through each one.
Who may not be a good fit
OTC loans are powerful, but they're not for everyone. This program may not be right for you if:
- You want a second home or investment property on VA or FHA: VA and FHA OTC loans are for primary residences only. You must intend to live in the home once construction is complete. Conventional can be used for a second home or investment property.
- You want to act as your own general contractor: VA and FHA do not allow owner-builders. Conventional allows it on a primary residence only, and it adds significant review.
- Your build will take longer than the lender allows: Construction must be completed within 11 months on VA and Conventional and 12 months on FHA. If your project is larger or more complex, a traditional two-loan approach may be necessary.
- Your builder only offers cost-plus contracts: OTC loans require fixed-price contracts. If your builder won't provide one, they won't qualify for this program.
- You want to build with off-grid electrical: OTC loans require a permanent connection to a public or private electrical utility. Properties that rely solely on solar panels, generators, or other off-grid power sources do not qualify. Wells and septic systems are acceptable.
03What you can build
A One-Time Close loan covers more than a traditional house framed on your lot. These are the property types you can build, and what each one needs to qualify.
Single-family homes
The most common build. Your builder frames and finishes the home on your lot from the ground up.
- Eligible with VA, FHA and Conventional
- VA and FHA: must be your primary residence
- Conventional: can also be a second home or an investment property
Multi-unit properties (2 to 4 units)
Build a duplex, triplex or fourplex on one loan. Live in one unit and rent out the others to help cover the mortgage.
- Up to 4 units, with VA or Conventional
- VA: you must live in one of the units
- Conventional: can also be an investment property
- FHA construction loans are single-family only
Barndominiums
A barndominium is a home with a barn style shell, usually a metal building, finished inside as a full living space. It is eligible as long as the appraiser can find similar homes nearby that have sold. Those sales, called comparables, show the market accepts this kind of home.
- Eligible with VA and Conventional
- The appraisal must show acceptable comparable sales
- Built as a finished home by an approved builder, the same as any other build
- FHA allows a barndominium only as a single-family home on a concrete slab, with no metal exterior siding and no post-frame construction
Factory-built homes
Manufactured and modular homes are built in a factory and delivered to your land. Both are eligible, but they are not the same thing.
Manufactured homes
Built in a factory to the federal HUD code and delivered to your land in sections.
- Eligible with VA, FHA and Conventional
- Must be set on a permanent foundation
- Must be titled as real property together with the land
- There is a separate set of manufactured home requirements, so I will walk you through them before you choose a home
Modular homes
Built in sections in a factory to the same state and local building codes as a site-built home, then set on a foundation on your lot. Once it is finished, it is appraised like any other home.
- Eligible with VA, FHA and Conventional
- Set on a permanent foundation by your builder
How the draws work for factory-built homes
Because the home is built off site, your builder is paid on a different schedule than a site-built home. On VA and Conventional:
| Stage | Paid to the builder |
|---|---|
| Deposit to start production | 25% |
| Home finished at the factory | 65% |
| Delivered, set on the foundation and finished | 10% |
A 10% / 80% / 10% schedule can also be used. On FHA, up to 10% of the home can be paid at closing and 20% of the contract is held until the home is finished.
What does not qualify
Attached condos and co-ops, renovating or adding on to an existing home, and a lot where the home's foundation has already been poured.
04VA One-Time Close construction loans
The VA One-Time Close Construction Loan is one of the most powerful homebuilding benefits available to veterans and active-duty service members. It combines the legendary advantages of the VA loan program with the flexibility of new construction financing.
Who is eligible?
- U.S. Military Veterans with qualifying service
- Active-Duty Service Members
- National Guard and Reserve Members (meeting length-of-service requirements)
- Surviving Spouses of service members who died in the line of duty or from a service-related disability
VA OTC program highlights
| Feature | Details |
|---|---|
| Down Payment | 0% (100% financing available) |
| Minimum Credit Score | 580 (some lenders require higher) |
| Maximum Loan Amount | Up to $4 million |
| Mortgage Insurance | None required |
| Construction Period | Up to 11 months |
| Payments During Construction | None (interest is built into the budget) |
| Contingency Required | 5% of construction costs |
| Property Types | 1-4 units, primary residence only |
| Loan Terms | 30-year fixed, 30-year jumbo fixed |
VA funding fee
VA loans require a funding fee that varies based on your down payment, service type, and whether this is your first VA loan. The funding fee can be financed into the loan amount. Veterans with service-connected disabilities are exempt from the funding fee.
| Usage | 0% down | 5%+ down | 10%+ down |
|---|---|---|---|
| First Use | 2.15% | 1.5% | 1.25% |
| Subsequent Use | 3.3% | 1.5% | 1.25% |
VA OTC: key requirements
- Builder Approval: Your builder must be approved by the lender's construction administration partner. VA no longer requires a separate VA Builder ID.
- Budget Inclusions: VA loans require certain costs to be included in the builder's budget: interest-only payments during construction, property taxes, builder's risk insurance, title update fees, and draw fees.
- 1-Year Builder Warranty: The builder must provide a 1-year warranty using VA Form 26-1859 (Warranty of Completion of Construction).
- Energy Conservation: Builder must certify the home meets International Residential Code energy standards.
- Termite Treatment: Required in areas rated 'moderate to heavy' or 'very heavy' on the Termite Infestation Probability Map.
- No Owner-Builders: You cannot act as your own general contractor on a VA OTC loan.
How VA loan terms work
Unlike conventional loans, VA OTC loan terms begin at the note date, not at modification. This means the construction period is "backed out" of your loan term. For example, a 30-year loan with an 11-month build converts to 29 years and 1 month of permanent financing at modification.
05FHA One-Time Close construction loans
FHA One-Time Close Construction Loans are an excellent option for borrowers who may not qualify for conventional financing or who want to take advantage of FHA's more flexible credit requirements. These loans are insured by the Federal Housing Administration, allowing lenders to offer competitive terms to a broader range of borrowers.
FHA OTC program highlights
| Feature | Details |
|---|---|
| Down Payment | 3.5% minimum |
| Minimum Credit Score | 650 |
| Maximum Loan Amount | FHA county loan limits apply |
| Mortgage Insurance | Upfront MIP (1.75%) + Annual MIP |
| Construction Period | Up to 12 months |
| Payments During Construction | None (payments start when the home is finished) |
| Contingency Required | Up to 10% allowed, not required |
| Property Types | Single-family (1 unit), primary residence only |
| Loan Terms | 15 or 30-year fixed |
FHA mortgage insurance explained
FHA loans require two types of mortgage insurance premium (MIP):
- Upfront MIP: 1.75% of the loan amount, typically financed into the loan.
- Annual MIP: Most 30-year FHA loans today carry about 0.50% to 0.55% of the loan amount per year. Paid monthly as part of your mortgage payment.
- Duration: For loans with LTV > 90%, MIP is required for the life of the loan. For LTV ≤ 90%, MIP can be removed after 11 years.
Key FHA-specific requirements
- HUD Approval: Property must meet HUD minimum property standards.
- Single-Family Only: FHA OTC loans are for 1 unit homes. To build a duplex, triplex or fourplex, use VA or Conventional.
- One Licensed Builder: A single licensed, full-time builder must be approved by the lender and handle the whole project, site work included.
- No Owner-Builders: You cannot act as your own general contractor on FHA OTC loans.
06Conventional One-Time Close construction loans
Conventional One-Time Close Construction Loans offer the most flexibility for borrowers with strong credit profiles. These loans are not government-insured, which means they follow guidelines set by Fannie Mae and the individual lender. This can result in more property type options and potentially better terms for well-qualified borrowers.
Conventional OTC program highlights
| Feature | Details |
|---|---|
| Down Payment | 5% minimum |
| Minimum Credit Score | 620 |
| Maximum Loan Amount | Conforming and High-Balance limits |
| Mortgage Insurance | Required if LTV > 80%, removable at 80% |
| Construction Period | Up to 11 months |
| Payments During Construction | Interest-only on amount drawn |
| Contingency Required | 5% of construction costs |
| Property Types | 1-4 units, primary, second home, investment |
| Loan Terms | 15/30-year fixed, 7/6 and 10/6 ARMs |
Conventional advantages
- Occupancy Flexibility: Unlike VA and FHA, conventional OTC loans are available for second homes and investment properties.
- No Upfront Mortgage Insurance: PMI is paid monthly and can be removed once you reach 20% equity.
- ARM Options: Adjustable-rate mortgages may offer lower initial rates for borrowers who plan to refinance or sell within a few years.
- Owner-Builder Possible: Owner-builders are allowed on conventional OTC loans for primary residences only (requires significant documentation).
- Unique Properties: Barndominiums and other unique property types may be easier to finance conventionally if the appraisal shows acceptable comparables.
Conventional loan term calculation
Unlike VA loans, conventional OTC loan terms begin at the modification date, not the note date. This means a 30-year loan with an 11-month build still converts to a full 30-year permanent financing term after construction is complete.
07Side-by-side comparison
Use this comparison chart to quickly identify which OTC loan program best fits your situation. Keep in mind that specific requirements may vary by lender.
| Feature | VA | FHA | Conventional |
|---|---|---|---|
| Down Payment | 0% | 3.5% | 5% |
| Min. Credit Score | 580 | 650 | 620 |
| Max LTV | 100% | 96.5% | 95% |
| Mortgage Insurance | None (funding fee) | Upfront + Annual MIP | PMI if LTV > 80% |
| Max Loan Amount | $4 million | County limits | Conforming/Hi-Bal |
| Units | 1-4 | 1 only | 1-4 |
| Construction Period | 11 months | 12 months | 11 months |
| Payments During Build | None | None | Interest-only |
| Contingency | 5% required | Up to 10% | 5% required |
| Occupancy | Primary only | Primary only | Primary, 2nd, Inv. |
| Owner-Builder | No | No | Primary only |
| Float-Down Option | Yes | Yes | Yes |
| Loan Term Start | Note date | Note date | Modification date |
Which loan is right for you?
Choose VA if
You're an eligible veteran or service member who wants 0% down, no PMI, and don't mind the funding fee. Best for maximizing purchasing power.
Choose FHA if
You have a credit score in the 650 to 680 range, limited savings for down payment, and are comfortable with mortgage insurance. Good for first-time buyers building a single-family home.
Choose Conventional if
You have solid credit (620+), at least 5% down, and want to avoid government loan restrictions. Best for second homes, investment properties and removing PMI later.
08Finding and qualifying your builder
Your builder is your most important partner in the construction process. Choosing the right builder can mean the difference between a smooth build and a nightmare. Here's how to find and vet your builder effectively.
Common builder qualification requirements
To be approved for a construction loan, builders typically must meet these requirements. Note: specific requirements can vary from lender to lender.
- Minimum 2-3 years in the construction business
- At least 10 completed homes, with 5 or more of them ground-up new construction
- A business credit check (Dun & Bradstreet)
- Valid state/local contractor's license (where required)
- General liability insurance and workers' compensation coverage
- Certificate of good standing from the state
- References from recent clients
- No unresolved complaints or legal issues
Questions to ask potential builders
- How long have you been building homes?
- Can you provide references from recent clients?
- Do you have experience with construction loans and the draw process?
- Can you provide a fixed-price contract?
- What is your typical construction timeline for a home like mine?
- How do you handle change orders and cost overruns?
- Who will be my primary point of contact during the build?
- Can I visit current job sites?
- What warranty do you provide after completion?
- Are you familiar with the specific requirements of VA/FHA/Conventional construction loans?
Construction contract requirements
Your construction contract is a critical loan document. Lenders have strict requirements about what type of contract is acceptable:
- Fixed-Price Contracts Only: The contract must specify a fixed total price for the construction. This protects both you and the lender from unlimited cost exposure.
- Cost-Plus Contracts Are NOT Allowed: Contracts where you pay the builder's costs plus a percentage markup are not permitted on any OTC loan.
- Contract Must Match Budget: The contract price must exactly match the itemized cost breakdown. Any discrepancy will delay your loan approval.
- Change Order Policy Required: The contract must include a written change order policy stating that all changes must be documented in writing and signed by both you and the builder.
- Payment Terms: The contract must specify that payments are based on work completed (draw schedule), not a predetermined payment timeline.
- Build Timeline: The estimated construction timeline must be stated in the contract and cannot exceed the maximum allowed (11 months on VA and Conventional, 12 months on FHA).
- Turnkey Completion: The contract must be for turnkey completion, meaning the builder completes all work. You cannot perform any construction work yourself (no sweat equity).
- No Pre-Construction Work: Construction cannot begin before closing. Any work started before closing can disqualify the loan.
No pre-start activity allowed
Construction cannot begin before your loan closes. This is called "pre-start" and it can disqualify your entire loan. The property must be raw, unimproved land at the time of closing.
- Site clearing or grading
- Pouring foundation or any excavation work
- Beginning physical work after pulling permits
- Ordering or delivering materials to the site
- Any physical construction activity whatsoever
Note: Pulling permits alone is generally okay in most states (Hawaii and California require permits before closing), but no physical work can begin until after you close.
09Understanding the draw process
The draw process is how your builder gets paid during construction. Understanding this process helps you stay informed and ensures your project stays on track.
How draws work
Instead of giving your builder all the money upfront, funds are released in stages as work is completed. This protects both you and the lender by ensuring payment only goes out for verified progress.
- Builder Completes Work: Your builder finishes a phase of construction (foundation, framing, etc.)
- Draw Request Submitted: Builder submits a draw request specifying the work completed and amount needed
- Inspection Ordered: The construction administrator orders an inspection to verify the work
- Inspection Completed: Inspector confirms the work matches the draw request and provides photos and a completion report
- Funds Released: Once approved, funds are wired directly to the builder
Key draw process details
- Funds for Work Completed Only: Draws are based on the percentage of work completed. No funds can be advanced for materials that haven't been installed.
- Initial Draw at Closing: At closing, an initial draw can pay for or pay off the land and give your builder up to 10% of the build cost to get started.
- Number of Draws: VA and Conventional projects have 5 to 12 draws depending on the loan amount. FHA projects have up to 5. Additional draws may be available for an additional fee.
- Final Draw at Completion: The last draw is released only after the home passes its final inspection. On FHA, 10% of the contract (20% on factory-built homes) is held until then.
- Inspection Required: Before each draw is released, an independent inspector verifies that the work has been completed as requested.
10Common questions answered
Can I build on land I already own?
Yes! If you already own land, you can refinance it into the construction loan. The loan amount will include any existing liens on the lot plus the cost to construct. You may also receive equity credit if the land has appreciated in value.
Can I use an OTC loan to build on property that already has a home?
No. OTC construction loans require vacant, unimproved land at the time of closing. This means several common requests do not qualify: building on land that already has an existing home on it, building an additional home on a property where you already live, adding on to or expanding an existing home, and completing unfinished construction from a previous project. OTC loans are strictly for new, ground-up construction on vacant land.
Can I finance the land purchase into the loan?
Yes. If you're purchasing land, the cost can be included in your construction loan. If you already own land free and clear, it can be refinanced into the loan and may count toward your down payment as equity.
Do I make payments during construction?
It depends on the loan type. On VA and FHA you make no payments during the build, because the interest is built into the builder's budget. On Conventional you make interest-only payments on the amount drawn so far.
When do my regular mortgage payments start?
Your regular principal and interest payments begin after construction is complete and the loan converts to permanent financing. During construction you make no payments on VA and FHA, and interest-only payments on the amount drawn on Conventional.
What are the closing costs on a construction loan?
Closing costs typically range from 2-5% of the loan amount and include appraisal fees, title insurance, origination fees, and prepaid items. Construction loans may also include additional fees for the construction administration and draw inspections.
How long does the approval process take?
Plan for 60-90 days from application to closing. This includes loan approval, builder approval, project approval, appraisal, and document preparation. Having your builder and plans ready before applying can speed up the process.
What if construction takes longer than expected?
VA and Conventional builds get 11 months, plus time to sign the final paperwork. If that is not done within 12 months of closing, you may need to requalify. On FHA, a build that runs past the 12-month term has its rate re-priced to the current market. Work with your builder to set realistic timelines and avoid delays.
More questions
Can I make changes during construction?
Yes, but change orders can impact your budget, timeline, and potentially your loan. Any changes must be documented in writing and approved. Changes that increase costs may require additional funds out of pocket if they exceed your contingency.
What happens if my builder doesn't finish the project?
This is rare but serious. The construction administrator monitors progress and can intervene early if issues arise. Choose a well-established builder with a track record of completing projects. Your contingency fund provides some buffer for resolving issues.
Do I need permits before closing?
It varies by location. In most states, permits are not required before closing. They're obtained after closing when construction begins. However, Hawaii and California typically require permits prior to close. Your loan officer can advise based on your location.
Can my builder start any work before we close?
Absolutely not. This is called "pre-start" and it can disqualify your entire loan. No site clearing, no grading, no foundation work, no excavation, no materials delivered to the site, nothing. The property must be raw, unimproved land at closing. Even if your builder is eager to get started, they must wait until after closing. This is non-negotiable.
Can I be my own general contractor (owner-builder)?
VA and FHA loans do not allow owner-builders. Conventional allows it on a primary residence only, with extensive documentation proving your qualifications. It adds significant review to the loan process.
What credit score do I need?
At the lenders I work with, the minimum credit scores are VA 580, FHA 650 and Conventional 620. Higher scores generally result in better rates and terms.
What if interest rates drop during construction?
VA, FHA and Conventional OTC loans all offer a float-down when the home is finished. If market rates have improved since your closing, your rate can be reduced. If rates have increased, you keep your original locked rate.
Construction loan checklist
Follow it from first call to breaking ground.