ONE-TIME CLOSE CONSTRUCTION LOANS

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Building a home is different from buying an existing property. A one-time close construction loan—also called a construction-to-permanent loan—can combine the financing for the land, construction of the home, and permanent mortgage into a single transaction.

Fairhope Mortgage offers one-time close construction financing through eligible Conventional, FHA, VA, and USDA loan programs.

Instead of obtaining a temporary construction loan and then applying for a completely new mortgage after the home is finished, a one-time close loan establishes the construction and permanent financing together before construction begins.

WHAT IS A ONE-TIME CLOSE CONSTRUCTION LOAN?

A one-time close construction loan combines two stages of financing:

Construction Phase — Funds are disbursed during construction as work is completed.

Permanent Mortgage — After construction is complete and applicable requirements are satisfied, the loan transitions into the permanent mortgage.

The borrower generally closes before construction begins.

During construction, funds are released through a draw process to pay the builder and other eligible construction expenses.

Once the home is completed, required inspections and documentation are obtained, and the construction phase ends, the loan transitions to permanent financing without requiring the borrower to obtain an entirely separate mortgage.

WHY USE A ONE-TIME CLOSE CONSTRUCTION LOAN?

One of the biggest advantages is eliminating the uncertainty associated with obtaining a separate construction loan and permanent mortgage.

Depending on the program and transaction, potential benefits can include:

• One primary mortgage closing rather than separate construction and permanent loan closings

• Permanent financing established before construction begins

• The ability to purchase the lot and finance construction together

• The ability to build on land you already own

• Potential use of existing land equity in the transaction

• Construction funds disbursed through an established draw process

• Fewer concerns about qualifying for an entirely new mortgage after construction

• Financing options ranging from lower-down-payment government programs to conventional financing for highly customized homes

The appropriate construction program depends on the borrower, property, location, builder, construction budget, land ownership and type of home being built.

WHAT CAN BE INCLUDED IN A CONSTRUCTION LOAN?

An eligible construction budget may include much more than simply the cost of framing and building the house.

Depending on the loan program, plans, appraisal and lender requirements, eligible costs may include:

• Land purchase

• Construction of the home

• Site preparation

• Clearing and grading

• Foundation work

• Driveways and walkways

• Utility connections

• Well and septic systems

• Permits

• Builder costs

• Materials and labor

• Architectural or engineering expenses

• Landscaping and other eligible site improvements

• Certain permanently installed appliances and equipment

Conventional construction financing can provide considerably more flexibility for customized and higher-end homes, including certain additional improvements discussed below.

THE LAND: BUY IT OR BUILD ON LAND YOU ALREADY OWN

You do not necessarily have to already own the lot before obtaining a construction-to-permanent loan.

Depending on the transaction, you may be able to:

Purchase the land as part of the construction transaction,

Build on land you already own, or

Use eligible equity in land you already own as part of the financing structure.

If you already own the property, it is important to review when and how you acquired it, its current value, any existing liens, and the construction program being used.

Land equity can be particularly valuable for borrowers who purchased property before deciding to build.

THE “AS-COMPLETED” APPRAISAL

A construction loan generally does not rely solely on what the property is worth today.

The appraiser reviews the plans, specifications, construction contract, site and proposed improvements to develop an opinion of the property's expected value when construction is complete.

This is commonly referred to as the “as-completed” value.

That value can be critical because the maximum financing may be affected by both the project's documented costs and the property's expected completed value.

A $700,000 construction budget does not automatically mean the finished property will appraise for $700,000.

This is especially important when designing highly customized homes or including expensive improvements that may not contribute an equal dollar amount to appraised value.

CONSTRUCTION DRAWS

The entire construction budget is generally not handed to the builder at closing.

Instead, construction funds are held and released through a draw process as construction progresses.

For example, draws might correspond with stages such as:

Site work and foundation

Framing

Roof and exterior

Mechanical systems

Drywall and interior work

Cabinets and finishes

Final completion

The exact draw schedule varies by program, lender and construction contract.

Inspections or other documentation may be required before funds are released.

FHA ONE-TIME CLOSE CONSTRUCTION LOANS

FHA calls its program Construction to Permanent financing.

It combines construction financing and a traditional FHA permanent mortgage using a single mortgage closing before construction begins.

The borrower must either already own the land or purchase the land as part of the construction transaction.

The borrower must contract with an eligible builder/general contractor, and FHA requirements apply to the borrower, property and completed home.

FHA construction-to-permanent financing can be particularly useful for borrowers who want to build a primary residence but do not have the larger down payment that may be associated with some construction programs.

The maximum mortgage is subject to FHA's applicable loan-to-value requirements and is based on FHA's calculation of the property's adjusted value.

FHA construction financing is intended for a home the borrower will occupy as a principal residence and is subject to FHA loan limits and other FHA requirements.

FHA may be a strong construction option when:

• The borrower wants a lower-down-payment construction option

• The home will be the borrower's primary residence

• The proposed property fits within FHA loan limits

• The builder and construction project meet program requirements

• The home and improvements are appropriate for FHA financing

VA ONE-TIME CLOSE CONSTRUCTION LOANS

Eligible veterans, active-duty service members and other qualified VA borrowers may be able to use their VA home-loan benefit to construct a primary residence.

VA expressly permits one-time and two-time construction loans.

With a VA one-time close construction-to-permanent loan, the construction financing and permanent VA mortgage are closed together, with permanent financing established before construction.

VA construction financing can be especially attractive because qualified VA borrowers may be eligible for financing without a traditional down payment, subject to VA entitlement, reasonable value, lender requirements and the complete transaction.

VA construction loans still require a qualifying borrower, eligible property, acceptable builder and construction project.

VA may be a particularly strong option when:

• The borrower has eligible VA home-loan benefits

• The property will be the borrower's primary residence

• The borrower wants to minimize the amount of cash required for the project

• The plans, specifications and completed home meet VA requirements

• The builder and construction process satisfy applicable requirements

A VA borrower should not assume that every builder offering new construction is set up to participate in a VA one-time close transaction. Builder and project review should occur early.

USDA ONE-TIME CLOSE CONSTRUCTION LOANS

USDA's Single Family Housing Guaranteed Loan Program also permits eligible single-close construction-to-permanent financing.

USDA describes the program as combining short-term construction financing and the long-term permanent residential mortgage with one closing before construction begins.

USDA can provide up to 100% financing for qualifying borrowers and properties, making it potentially one of the lowest-cash-to-close ways to build a home.

However, USDA has additional eligibility requirements.

The property must be located in a USDA-eligible area.

Household income must meet USDA limits.

The home must be used as the borrower's primary residence.

The project must satisfy USDA property and construction requirements.

The lender and construction transaction must meet USDA's single-close requirements.

USDA can be especially useful for qualified borrowers building in eligible areas outside larger urban centers.

CONVENTIONAL ONE-TIME CLOSE CONSTRUCTION LOANS

Conventional construction financing can be an excellent choice for borrowers building custom homes, higher-priced properties, or homes with features that may not fit as easily within government construction programs.

Fannie Mae permits single-closing construction-to-permanent transactions where construction financing and permanent financing are established together.

The borrower can purchase the lot as part of the transaction or, depending on the transaction structure, build on land already owned.

Conventional construction financing can also provide greater flexibility in the design and scope of a custom home, subject to the construction contract, appraisal, loan-to-value limits and lender requirements.

CONVENTIONAL CONSTRUCTION LOANS FOR CUSTOM AND HIGH-END HOMES

This is one of the areas where conventional construction financing can be particularly attractive.

A conventional construction project may potentially incorporate eligible improvements such as:

• Swimming pools

• Outdoor kitchens

• Covered outdoor living areas

• High-end patios and hardscaping

• Detached or attached garages

• Workshops or certain accessory structures

• Extensive landscaping

• Premium flooring and cabinetry

• Custom kitchens

• Luxury bathrooms

• Upgraded appliances and fixtures

• Smart-home systems

• Higher-end architectural finishes

• Other permanent improvements included in the approved plans and construction contract

These items are not automatically financeable simply because they are included in the construction contract.

The complete project must still satisfy applicable appraisal, loan-to-value, property eligibility and lender requirements.

This creates an important consideration for custom-home buyers:

COST DOES NOT ALWAYS EQUAL VALUE.

For example, adding a $100,000 pool and elaborate outdoor-living package does not necessarily increase the appraised value of the completed property by $100,000.

The appraiser must determine the market-supported value of the completed home and improvements.

For borrowers planning significant luxury upgrades, reviewing the plans, budget and expected valuation early can help avoid an unexpected cash requirement later in the construction process.

FHA VS. VA VS. USDA VS. CONVENTIONAL CONSTRUCTION LOANS

FHA

Best suited for: Primary-residence borrowers who may benefit from FHA's more flexible qualification and lower-down-payment structure.

Occupancy: Primary residence.

Land: Can generally be owned already or purchased through the transaction.

Major advantage: Lower-down-payment construction option for qualified borrowers.

Considerations: FHA loan limits, property standards and program-specific construction requirements apply.

VA

Best suited for: Eligible veterans and other qualified VA borrowers building a primary residence.

Occupancy: Primary residence.

Land: Can potentially be incorporated into the construction transaction or already owned, subject to applicable requirements.

Major advantage: Potential for very high leverage, including no traditional down payment for qualifying transactions.

Considerations: VA eligibility, entitlement, reasonable value, builder/project requirements and other VA construction requirements apply.

USDA

Best suited for: Income-eligible borrowers building a primary residence in a USDA-eligible area.

Occupancy: Primary residence.

Land: Can be incorporated into an eligible single-close transaction.

Major advantage: Up to 100% financing for qualified borrowers and eligible properties.

Considerations: USDA household-income limits, geographic eligibility and property/program requirements apply.

CONVENTIONAL

Best suited for: Custom homes, higher-priced projects and borrowers seeking greater flexibility in the design and features of the completed property.

Occupancy: Depends on the applicable conventional program and transaction.

Land: May be purchased in the transaction or already owned, depending on transaction structure.

Major advantage: Greater flexibility for customized construction and certain higher-end permanent improvements.

Considerations: Down payment/equity, appraisal, loan-to-value, construction budget and lender requirements apply.

BUILDING A HOME WITH A SWIMMING POOL

A pool is a good example of why construction financing should be selected before the construction contract is finalized.

With an eligible conventional construction program, a permanently installed swimming pool may potentially be included as part of the approved construction project when it is included in the plans, specifications, construction contract, appraisal and approved budget.

That can allow a borrower to finance the home and pool as part of the overall construction project rather than completing the home first and then obtaining separate financing to install the pool.

However, the appraiser must consider the pool when determining the property's as-completed value.

A pool's construction cost and its contribution to market value are not necessarily the same.

This can be particularly relevant along the Gulf Coast, where pools, outdoor kitchens and outdoor living areas are common components of higher-end new construction.

CAN YOU ADD A DETACHED GARAGE, WORKSHOP OR OUTDOOR KITCHEN?

Potentially.

Permanent improvements that are part of the approved construction plans and contribute to the residential property may potentially be incorporated into certain conventional construction transactions.

Eligibility depends on the specific improvement, property, appraisal, zoning, construction contract and loan program.

Discuss major accessory structures or expensive exterior improvements before finalizing the construction contract rather than assuming they can be added to the loan later.

WHAT ABOUT MANUFACTURED HOMES?

Certain construction-to-permanent programs can also be used for eligible new manufactured homes.

Depending on the program and transaction, financing may potentially include the new manufactured home, land, site preparation, foundation, delivery, installation, utility connections and other eligible improvements.

Manufactured homes have additional HUD certification, foundation, title and property requirements.

See our Manufactured Home Loans page for more information.

CAN I BE MY OWN GENERAL CONTRACTOR?

Do not assume that a one-time close construction loan allows you to act as your own builder.

Construction programs generally have requirements regarding builder experience, licensing, insurance, financial capacity and project oversight.

FHA, for example, generally requires the borrower to contract with a licensed general contractor; a borrower may act as general contractor only when the borrower is also a licensed general contractor.

Builder eligibility should be reviewed before a construction contract is finalized.

WHAT IF I ALREADY STARTED CONSTRUCTION?

Contact us before assuming the project can simply be converted into a one-time close loan.

A defining characteristic of a one-time close construction transaction is that financing is established before construction begins.

Once construction has started or construction liens, financing or significant work already exist, different financing requirements or loan structures may be necessary.

WHEN SHOULD I APPLY FOR A CONSTRUCTION LOAN?

Ideally, contact Fairhope Mortgage before you:

• Purchase the land

• Sign the final construction contract

• Make a large non-refundable builder deposit

• Begin site work

• Start construction

• Pay for major improvements yourself

• Finalize expensive upgrades such as a pool or detached structure

Early review gives us an opportunity to evaluate the borrower, land, builder, plans, construction budget and proposed loan program together.

THE ONE-TIME CLOSE CONSTRUCTION PROCESS

Step 1 — Initial Qualification

We review your income, assets, credit, debts and proposed construction budget to determine which construction programs may be appropriate.

Step 2 — Land and Builder Review

We determine whether you already own the land or will purchase it through the transaction and review applicable builder requirements.

Step 3 — Plans, Specifications and Construction Contract

The project's plans, specifications, selections and construction budget are assembled for review.

Step 4 — As-Completed Appraisal

An appraiser evaluates the proposed home and property based on the plans and specifications and estimates its value when completed.

Step 5 — Final Underwriting

The borrower, builder, property, construction budget, appraisal and loan structure are reviewed.

Step 6 — One-Time Closing

The construction and permanent financing are closed before construction begins.

Step 7 — Construction and Draws

Construction begins and approved funds are released as work progresses and applicable draw requirements are satisfied.

Step 8 — Completion

Final inspections and required completion documentation confirm that the home has been completed in accordance with applicable requirements.

Step 9 — Permanent Mortgage

The construction phase ends and the loan transitions to its permanent mortgage phase according to the loan documents.

FREQUENTLY ASKED QUESTIONS

What is a one-time close construction loan?

It is a construction-to-permanent mortgage that combines construction financing and permanent mortgage financing into a single transaction.

Do I need to own land before applying?

Not necessarily. Depending on the program, you may be able to purchase the lot as part of the construction transaction or build on land you already own.

Can I use land I already own as my down payment?

Existing land equity may potentially contribute toward the required borrower investment or equity in certain transactions. The calculation depends on the loan program, transaction structure, land value, acquisition history and existing liens.

Can FHA be used for a one-time close construction loan?

Yes. FHA provides Construction to Permanent financing that combines construction and permanent financing through a single mortgage closing before construction begins.

Can VA be used for construction?

Yes. VA permits one-time and two-time construction loans for eligible borrowers and properties.

Can USDA finance new construction?

Yes. USDA's Guaranteed Loan Program provides single-close construction-to-permanent financing for eligible borrowers and properties.

Can I build a custom home with a conventional loan?

Yes. Conventional construction financing can be particularly useful for custom-home projects.

Can I include a swimming pool in my construction loan?

Potentially. Certain conventional construction programs may permit a permanently installed pool when it is included in the approved plans, specifications, construction contract, appraisal and construction budget. Eligibility varies by transaction and lender.

Can I finance an outdoor kitchen?

Potentially. Permanently installed outdoor improvements may be eligible under certain conventional construction programs when properly incorporated into the approved project.

Can I finance landscaping?

Certain landscaping and site improvements may be eligible when included in the approved construction project. Program requirements vary.

What happens if construction costs increase?

Cost overruns need to be addressed according to the loan documents and construction program. Borrowers should maintain appropriate reserves because not every cost increase can automatically be added to the loan.

What if the completed house appraises for less than the construction cost?

The appraisal can affect the maximum financing. If the project's cost exceeds the market-supported as-completed value, additional borrower funds or changes to the project may be required.

Do I make mortgage payments during construction?

Payment requirements during the construction period depend on the specific loan structure and program. We review the proposed construction-phase payment structure before closing.

Can I change the house after construction starts?

Changes may be possible, but material change orders can affect the construction budget, appraisal, loan amount and draw process. Major changes should be reviewed before work is performed.

Can I use a one-time close loan for a manufactured home?

Certain programs permit eligible new manufactured homes to use construction-to-permanent financing, subject to additional manufactured-housing requirements.

WHY WORK WITH FAIRHOPE MORTGAGE FOR A CONSTRUCTION LOAN?

Construction financing requires coordination among the borrower, lender, builder, appraiser, title company, inspectors and other parties.

The loan needs to work not only for the borrower but also for the land, builder, construction contract, plans, appraisal and completed property.

Fairhope Mortgage can compare available FHA, VA, USDA and conventional construction options to determine which structure best fits the borrower and proposed home.

For custom projects, we can also evaluate how features such as pools, outdoor living areas, garages and other permanent improvements may affect the financing structure and as-completed appraisal.

CHECK YOUR CONSTRUCTION LOAN OPTIONS

Thinking about building a home?

Before purchasing land, signing a construction contract or making a large builder deposit, let us review the proposed project.

We can compare FHA, VA, USDA and conventional one-time close options and help determine how the land, construction budget, builder, down payment or equity and proposed improvements fit together.

Already have land, plans or a builder?

Even better. Send us the information and we can begin evaluating the complete transaction.

ABOUT THE AUTHOR

Tom Kalagher | Founder & Branch Manager, Fairhope Mortgage

Tom Kalagher is the Founder and Branch Manager of Fairhope Mortgage, LLC. Based in Fairhope, Alabama, Tom works with borrowers purchasing, building and financing homes through conventional and government mortgage programs, including FHA, VA, USDA and conventional construction-to-permanent financing.

Tom works with borrowers, builders and real estate professionals to evaluate construction projects before closing, including land acquisition, existing land equity, construction budgets, builder requirements, as-completed appraisals and permanent financing.

For custom-home borrowers, Tom also helps evaluate financing strategies for projects that may include pools, outdoor living areas, garages and other permanent improvements as part of the overall construction project.

Tom Kalagher — NMLS #2028566
Fairhope Mortgage, LLC — NMLS #2561450
Fairhope, Alabama
Phone: (251) 391-5618
Website: Fairhope-Mortgage.com

IMPORTANT

Construction-to-permanent loan availability, loan-to-value limits, down-payment requirements, builder requirements, eligible construction costs, loan limits, interest rates, construction periods and underwriting standards vary by loan program and lender and are subject to change. Inclusion of an improvement in a construction contract does not guarantee that the improvement or its full cost can be financed. The as-completed appraisal and applicable program requirements can affect the maximum loan amount. Not all borrowers, builders, properties or construction projects will qualify. This information is for educational purposes and is not a commitment to lend.