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z#Loan Product – FHA One-Time-Close
The FHA One-Time Close (OTC) loan is a product that allows borrowers to combine financing for a lot purchase, construction and permanent mortgage into one first mortgage loan. Ideally suited for borrowers who are purchasing new construction, the FHA OTC loan offers the benefits of low money down financing, competitive interest rates and one closing for all financing.
Updated FHA OTC Program overlays and eligibility include:
- Site-Built, Modular and Manufactured homes:
- Maximum of $150,000 disbursement at closing for land acquisition or payoff.
- Building permits (where required by the jurisdiction):
- Site-Built and Modular home – applicable building permits to be obtained prior to closing.
- Manufactured home – applicable building permits to be obtained prior to closing when the initial disbursement is greater than
FHA One-Time Close Loan – The Basics
- Designed to simplify the financing process for new home buyers, eliminating the need to obtain both a construction loan and permanent mortgage
- Insured by the Federal Housing Administration (FHA), which helps keep rates low
- For Construction-to-Permanent, closing occurs before construction begins
- 96.5% Maximum LTV
- No payments due during the construction phase
- Closing costs may be financed
- 15 and 30 year fixed rates available
- No re-qualification once construction is complete
- A single closing reduces closing costs, saving your borrowers money
What are the benefits?
Single Closing Saves Time and Money
With the FHA OTC loan, borrowers can secure financing for the purchase of the land, the construction and the home’s permanent mortgage in a single closing. Only one closing means only one set of closing costs, helping save money. It also allows the process to move forward without interruption from potential snags in financing other aspects later on.
Low Down Payment
- The FHA OTC loan’s maximum loan-to-value (LTV) ratio is 96.5%. This gives borrowers the freedom to close on the loan with as little as 3.5% down
- Once the construction phase is complete, the borrowers do not have to re-qualify for a permanent mortgage since the permanent loan is closed before construction begins
- Since the permanent mortgage is closed before construction begins, the fixed rates on FHA OTC loans will not be subject to change during the construction phase or at any point
Who is eligible for an FHA One-Time Close Loan?
The FHA OTC loan product is available to any borrower who meets the minimum qualifying criteria. This includes first time and repeat buyers. Here are the basic requirements for FHA OTC loan approval:
- Borrower must have contracted with a builder (must be licensed general contractor)
- Borrower must be purchasing the land at closing, or currently own their property
- At closing, after funds are disbursed to cover the purchase of the land, the balance of the mortgage proceeds must be placed in an escrow account to be disbursed as construction progresses
- Amortization of the permanent mortgage must begin no later than the first of the month following 60 days from the date of the final inspection or issuance of the Certificate of Occupancy
- Maximum loan amounts will vary by location
- Minimum FICO of 640
In which scenarios is the FHA One-Time Close Loan a good option?
The FHA One-Time Close loan program can provide an ideal solution for the following borrower scenarios:
- Building a new home on a vacant lot and in need of financing
- Less-than-perfect credit rating
- Not a lot of cash available for a down payment
- Wants the security of a fixed interest rate
- Having trouble finding an available home
- Wants custom home features
Buying a Home with the FHA One-Time Close Program
The process of buying a home with the FHA One-Time Close Loan begins with the borrower’s pre-approval to ensure they meet the necessary income and credit guidelines.
Next, the borrower must secure a general contractor or builder for the property and the lender must approve that builder. Once the builder has been confirmed, site selection begins.
Next, the project must be approved. The builder will submit the figures in terms of cost to the lender. The lender will then review the construction plans and costs and structure the loan accordingly. A construction contingency (typically around 5%) is usually added to the loan in case of overages, changes or unforeseen costs that may come up during construction.
Next, the loan is closed. The borrower provides the down payment while closing costs and escrows are handled. Now, construction can begin.
After construction is complete, the borrowers are free to move in to their new home. No re-qualifying necessary.