Constructing your dream home is an exciting adventure, yet this journey can easily turn into a nightmare if you lack a fundamental understanding of the financial aspect of home building. Construction loans come with multiple, disjointed processes, approvals, and closings that can create a whirlwind. Fortunately, there is the Conventional One-Time Close Construction Loan to take the stress out of the equation. This all-in-one loan also allows borrowers to finance the construction of a new home, in addition to the long-term mortgage.
If you’re in the market to build a new home, and would like not to try to juggle two different loans during the process, this guide will help you navigate everything from benefits and eligibility to comparisons and next steps.
What is a Conventional One-Time Close Construction Loan?
A type of a mortgage that funds the building of a new home, a Conventional One Time Close Construction Loan, provides the money for both the construction phase and the long-term permanent mortgage, which a borrower would need to pay it off. Instead of initiating two separate loans one for the construction and another for the mortgage you close on the construction loan at the outset, and the loan automatically converts to a standard mortgage once the home is built.
This combination loan is based on conventional loan security standards (no government financing). This is for credit-worthy borrowers that are ready to build on their city lot or acreage.
How Does It Work?
Here’s how the loan generally operates:
- Application & Approval – One loan application is used to apply for the construction and the permanent mortgage.
- Loan Closings – You close one time which is at the outset of construction. The loan goes into construction mode.
- During Construction – Money is gradually withdrawn (a process known as draws) as the house is constructed. Money is released in stages after inspections.
- Loan Conversion – When the home is finished, the loan will convert to a permanent mortgage (15 or 30) and do it all over again.
There is also no need to re-qualify or pay closing costs again when the construction is complete.
Key Benefits of One-Time Close Construction Loans
Here’s what to know about why custom home builders and lenders favor this type of loan:
1. Single Closing Process
The biggest perk is that you will close only once for both the construction and the mortgage. You don’t need to submit to two separate underwriting processes, appraisals and fee structures.
2. Fixed Interest Rate Options
Flourish with a Traditional One-Time Close Construction Loan You can secure your permanent mortgage rate before you even break ground with a Traditional One-Time Close Construction Loan. That protects you against any potential interest rate increases while the house is being built.
3. Lower Costs Over Time
You’re able to skip double sets of closing costs, a difference that can amount to thousands of dollars less than traditional two-time-close construction financing.
4. Smoother Process
You won’t have to re-qualify once the home is finished. Your income, credit, or employment does not have to be proved and rechecked multiple times, saving you time, stress, and paperwork.
5. Custom Home Flexibility
The loan is a good choice for borrowers working with builders to craft custom or semi-custom homes. As long as you put along some good builder, you will be able to have the most flexibility in your project scope.
Who Is Eligible?
Despite the benefits of this loan type, it comes with more stringent requirements than government-backed construction loans:
- Credit Score: A credit score of generally at least 680
- Down Payment: 5% – 20% (varies by lender)
- Debt-to-Income Ratio: 45% and less preferable
- Builder must be licensed and approved contractor or construction company
- Reserves: Lenders might want to see reserves on hand to make construction loan interest payments
VA Construction Loan vs. Conventional One-Time Close: Which is better?
There’s an extra benefit for military borrowers: the VA Construction Loan. Sponsored by the Department of Veterans Affairs, this loan enables eligible service members, veterans and some surviving spouses to construct a home with no down payment and without PMI (private mortgage insurance).
When comparing VA Loans vs Conventional construction loans, here are some key differences:
| Feature | VA Construction Loan | Conventional One-Time Close |
| Down Payment | 0% (for eligible borrowers) | 5–20% |
| PMI | Not required | Required if <20% down |
| Eligibility | Only veterans and eligible military | Open to all qualified borrowers |
| Credit Score | Lower credit score thresholds allowed | Higher score often required |
| Flexibility | Only available for primary residences | Can be used for primary homes, and sometimes second homes |
The VA loan could be more affordable if you are a veteran or an active-duty service member. For those who don’t qualify, the Conventional One-Time Close Construction Loan is equally convenient but not limited to specific property types and more liberal with borrower qualifications.
Why Work with VA Approved Builders?
Even if you decide to go with a conventional loan versus the VA home loan, contractors who are approved by VA can be a good choice. These are builders who have been checked to confirm that their quality and their licensing meets the type of licenses that you need to make sure that you’re building is in accordance with the federal and state. By sticking with experienced, established builders, you limit construction delays and keep up your end of the bargain with the lender.
No matter if you’re going after a VA loan or a more traditional option, finding the right builder is key to a successful building and financing experience.
Can This Loan Be Used for Rehab or Renovation Projects?
So they really work best for new construction, not renovations or rehabs. But if you’re looking to rehab or improve upon an existing property, a Conventional Rehab Loan might be a more suitable option.
Rehab loans enable borrowers to roll the purchase price and renovation costs into a single mortgage. It can be a winning solution for fixer-uppers or homes in need of major renovations.
What About Refinancing After Construction?
After your home is constructed and when the mortgage stage of home building begins, you can go about refinancing your mortgage later if necessary. A Conventional Refinance might make your loan more manageable: it allows you to go for an interest rate cut, or to increase your monthly payout, or to take out some equity for whatever plans you may have.
Some borrowers refinance after a few years to get rid of PMI once they have 20% equity or better credit or rates.
Step-by-Step Process to Apply
Here are the steps to take to begin your own Conventional One-Time Close Construction Loan:
Step 1: Pre-Qualification
How much you can afford Go to a lender to get an idea of how much you can borrow. This will involve taking a look at your credit score, income, assets, and debt-to-income ratio.
Step 2: Choose a Builder
Choose a builder with a proven track record and who is properly qualified. Most lenders maintain a list of approved builders and your contractor will need to supply proof of documentation, licenses, insurance and a project budget.
Step 3: Finalize Your Home Plans
Before applying for the loan, finalize your architectural plans and materials. These will be submitted to the lender for appraisal and underwriting.
Step 4: Submit Your Application
Request the loan with your financial institution. You will need to submit detailed documentation, including tax returns, pay stubs, bank statements, blueprints and the builder’s contract.
Step 5: Closing
You go to one closing.” Construction may commence soon thereafter, and payments are made in periodic draws as work is performed.
Step 6: Construction Phase
Interest-only payments are typically made during construction. The lender will have the property inspected at every stage before any cash is disbursed.
Step 7: Conversion to Mortgage
Once construction is over and you receive the certificate of occupancy, the loan automatically converts into your permanent mortgage.
Choosing the Right Lender
Not all lenders offer a One Time Close Construction Loan, and few offer the VA version of this Loan type. With a lender that knows construction loans and can go through all the steps with you.
Some lenders may provide in-house underwriting to get your approvals faster and keep communication between all parties smoother.
If you are in Texas or any sort of competitive market, selecting an experienced lender is more important than ever. We are experts at providing assistance for clients considering Conventional Loans and VA Construction Loans and we are in tune with approved builders to help monitor progress.
Final Thoughts
It doesn’t have to be overwhelming to build your own house. The Conventional One-Time Close Construction Loan eliminates two loans that combine one loan and lower cost and fewer hassles and more control. Ideal for first-time builders or to finance your dream home, this loan provides a clever and flexible option to help you bring your home to life.