Building a new home that suits your taste and preference is one of the salient goals many people plan toward. This does not exclude veterans and service-duty men. However, as with many goals, the bottleneck is the resources required to accomplish the goal of constructing your own home.
Nonetheless, there is a financing solution for home buyers looking to build their home at a go, and this solution is the one-time close loan for home construction. The one-time close construction loan is a loan program that enables you to build a home without a separate loan closing and closing cost.
Our aim at Security American Mortgage is to provide you with the best loan that suits your demand and walk you through this single loan process. In this article, we guide you through the meaning of a one-time close loan, the benefits of a single close loan, and the eligibility criterion for applying for an OTC.
What is the One Time Close Construction Loan?
The One Time Close Construction Loan is a construction loan that enables borrowers to build a home, purchase a lot and obtain a long-term or permanent mortgage. It includes the VA, Conventional, FHA, USDA, and Jumbo single-close construction loans.
The conventional Single-close construction loan program allows for interest-only payment during construction, which is then modified to a 30-year permanent loan with a lower interest rate upon completion. Under the VA one-close loan, the processes and finance needed to construct your home are combined into a single mortgage loan with a fixed rate.
An OTC construction loan is a viable choice for borrowers who desire to build their own with a private builder. These loan programs allow borrowers to qualify once, have a single appraisal, and get a home loan without securing two different loans before completing their home financing and construction.
Essential Things to Know About the One-Time Close Construction Loans
You must consider different factors when choosing the best construction loan for you and your family. Here are a few things to know about OTC loans:
- Designed to make financing easy for people who wish to build a new home. It removes the need to apply for separate loans to finance construction.
- Once you obtain an OTC loan and complete home construction, you can’t re-qualify for the same loan. However, your loan will be converted to permanent financing after the construction, and repayment will be amortized over 30 years. On the contrary, there are no conversions on the VA One-time close loan, and the rates are locked in before the building process and the loan closing. Hence, the rate at closing is the rate for the entire loan.
- Your employment will be verified during this period to ensure you’re still on a payroll.
- The closing occurs before you start construction.
- With conventional single-close loans, the borrowers will make interest-only payments on construction financing throughout the construction phase. However, for VA single-close loans, borrowers are excluded from making payments during the construction phase.
- There are 15, 20, or 30-year fixed rate options that include interest rate protection during construction.
- An 89.99% maximum loan-to-value mortgage is given for a conventional OTC loan. This highlights the proportion of your property value that will be loan financed by lenders. Hence, with an LTV of 89.99%, you will be required to pay a 10% down payment.
- Regarding the VA one-time close construction loan, veterans can get up to 100% financing for construction. This implies that borrowers are not required to make down payments. However, the VA funding fee may be financed into the loan.
- The conventional OTC loan requires a credit score of 720 and above. While there is no given credit score for the VA OTC loans, a minimum credit score of 620 is often required.
Can Veterans Apply for a Conventional One-Time Construction Loan?
If you’re seeking construction loans as a veteran, the options available are either to go for VA OTC construction loans or conventional OTC construction loans. We recommend you select the traditional OTC construction loans if you own land and possess equity. This will allow you to offset the 10% down payment required in conventional construction loans with your land or equity.
Mortgage lenders have more risk if there isn’t any equity in the transaction. However, veterans can still apply for conventional OTC loans whether they have equity. Rationally, veterans should compare their available options and select the perfect construction loan type.
VA One-Time Construction Loans vs. Conventional One-Time Construction Loans
Conventional loan rates are higher when compared to VA loans, given the same credit score and loan amount. A conventional borrower with a 740 credit score putting down 25% may be able to get a rate comparable to a VA loan. The VA loan could have a 640 credit score and get the same or better rate as a conventional borrower with 25% and a 720 credit score. Therefore, VA is typically the way you want to go if you’re a Veteran when it comes to purchasing.
However, when it comes down to a VA OTC construction loan, the rates and fees are now higher than on conventional one-time close loans. Also, there is only a jumbo, conventional one-time close construction loan available and no Jumbo VA construction option over $650K. A Veteran who owns their land might have equity to qualify for a conventional one-time close loan if it’s the best option for them at that time. That’s why we will give you several options so you can do what’s best for you and your family.
VA One-Time Construction Loans
A VA One-Time Close loan, also referred to as VA construction-to-permanent loan, enables qualified and fully eligible active service duty, veterans, Reservists, and National Guard, to use a single loan to finance the purchased lot, construction, and the permanent mortgage.
If you own your land, you can have a lot of equity in the loan. Also, if you possess a lien against the land, it will be paid off and rolled into the new loan.
Conventional One-Time Construction Loan
The conventional one-time close construction loan also called the Fannie Mae OTC construction loan, allows borrowers to purchase a lot, build a new home and obtain a long-term mortgage. The conventional OTC construction loan program merges all loan processes and funds into a single loan for constructing your home.
Benefits of a One-Time Close Construction Loan
Interest Only Payment is Required During Construction
Conventional one-time close loans require you to make the interest-only payment based on a draw schedule during the construction phase, while your lenders pay the contractors working on your new home in installments, depending on how much work has been done.
However, for the VA one-time close loan, you are not required to make any payment during the construction phase. As a veteran, you benefit from this advantage if you’re paying a mortgage on an existing home or rent.
Saves Money
The Conventional OTC Construction Loan program is created to make your mortgage process smooth and easy by providing you with only one closing date rather than the traditional two. Your building project, such as buying the land, constructing the home, and securing a permanent loan, can all in a single closing.
Excludes Re-Qualification
Once the construction phase is concluded, the borrowers are not allowed to re-qualify for another loan.
Requires Single Appraisal
The one-time close construction loan only requires a single appraisal carried out before closing on the loan. However, for a two-time close construction loan, two appraisals are required to be done, and the borrower will finance both.
Low Down Payment Options
The conventional one-time close construction loan’s maximum LTV rate is 89.99% for borrowers building the property as their primary residence. This requires you to make a down payment of 10%. Although, the 10% down payment rate may reduce if there’s equity on the land.
VA OTC construction loans allow borrowers to benefit from zero down payment because you can get up to 100% financing.
Eligibility Requirement for a One-Time Construction Loan
The OTC construction loan is available to borrowers that attain the minimum qualifying requirement for a Fannie Mae loan and the minimum criteria for an OTC Loan. The primary eligibility requirements include:
- Each borrower must attain the maximum conventional loan amount stipulated by the state of residence.
- Borrowers must have land or must be purchased one at closing.
- The amortization of the permanent mortgage loan is expected to begin at the start of the month, 60 days after the last inspection, and the certificate of occupancy issued.
- The borrower must contract a home builder/contractor, and such a contractor must be licensed as a general contractor.
- A minimum credit score of 720 is required for conventional OTC and 640 for VA OTC loans.
How to Apply for a One-Time Construction Loan
If you are a veteran or conventional individual considering using the OTC construction loan to purchase a new home, you can apply with Security American Mortgage. We will guide you through the process from start to finish and also assist you in selecting a home builder as part of your pre-qualification criteria.
As a veteran, let us pre-qualify you for a VA purchase loan, VA construction, and other conventional loans, so you’ll know which product is best for you. Connect with us.