An FHA One-Time Close construction loan is issued by private lenders but backed by the government. It is also known as a construction-to-permanent mortgage. This loan is different from the FHA new purchase loans for existing property. Instead, this loan combines your construction and permanent financing into one loan.
In general, if a borrower wants to build a home, he will need to apply for a construction loan first. Then, after construction, he applies for the mortgage on the property. As a result, there are two application processes and two closing dates.
The FHA One-Time Close loan uses a single loan and combines the two applications into one process with one closing date. Of course, there are specific steps and requirements to obtain the loan. There are also steps on how to proceed during the construction phase as well as the permanent residence phase.
Once the loan is approved, the loan will have a closing date before the construction actually begins. Because this is a construction loan, how the lender funds the investment is different. An escrow account is established to handle construction expenses and other fees during the construction phase.
The funds are paid out periodically during the different phases of construction. As a result, the construction project is monitored regularly to check for progress. During the building phase, the borrower does not make any mortgage payments. However, once the loan enters the permanent phase, or after the property is completed, the borrower will begin to make mortgage payments like a traditional home loan.
One of the significant benefits of an FHA One-Time Close loan is the simplified and mainstreamed process. It combines two applications into one. Moreover, this means that you save money with a one-time close, as opposed to two (one for construction and one of the traditional mortgage).
With only one application, you are essentially being given an interest rate lock. With two applications, you would have two different interest rates at whatever the market interest rate is at the time of closing. However, with one combined loan, you lock in your interest rate from construction through the permanent residence phase. Of course, this is only advantageous if interest rates rise during the mortgage phase.
Additionally, different from a traditional loan, this construction loan gives you the ability to build your dream home from the ground up. Designing and building your own home allows for customization that you would not be able to do if you purchased an existing property.
Unfortunately, this type of loan requires that the borrower do a lot of legwork. You will need to find a builder that is approved by the lender, as well as the lot or land for your new home.
Moreover, this type of loan usually requires waiting periods. The nature of the loan, the actual construction, and how the building progress is monitored all requires patience and waiting periods.