FHA One-Time Close Construction to Permanent

The FHA One-Time Close Construction to Permanent program is an exciting new product offered by FHA that allows a buyer to close one time on a new construction home. Before now, products existed that required a borrower to prequalify for a loan and then re-qualify to close once construction was complete. This can be precarious for both the builder and the buyer because a change in income, credit status, and employment could prevent a buyer from obtaining the loan, and the builder always faces a risk of the buyer backing out before construction is complete. But with the OTC program, these factors aren’t a concern; the total cost is settled up front and no additional items are needed from the buyer after closing. Some local banks offer similar construction loans, but they often require 20% down. The FHA OTC program has the same approval standards and 3.5% down payment requirement as a regular FHA loan.

In 2016, homebuilders reported an increase in new home constructions. The FHA One-Time Close program will promote the continued growth in our housing market, especially in the new construction sector. Many buyers get pre-approved for a home loan and then spend months looking for the perfect house. During this time spent searching, the buyers’ financial situations can change or interest rates can go up, changing their buying ability. This loan program allows buyers to custom-build the home of their dreams without the fear of losing their approval.

Builders are advantaged by being able to roll the land and home purchase into one loan with up to 90% construction funding. Also, up to 5 construction draws are available after closing. This product will benefit homebuilders because they’ll be able to build and sell homes more quickly, likely without the need for a realtor or middleman.

The FHA OTC program is as easy to close as a regular FHA loan. There are a few added worksheets needed for underwriting, but otherwise the process is the same. The investor must approve the builder and validate their credentials and the builder will need to complete a worksheet of their own for loan processing. Buyers who use the OTC program can feel confident about their purchase as all costs and charges are itemized for their review on the Loan Estimate and Closing Disclosure. The buyer can address any concerning costs with the lender and the builder before finalizing the loan. If desired, the builder and buyer can draw up a separate agreement to compensate for any additional costs not associated with the home loan. What’s great about the FHA One-Time Close loan is the buyer doesn’t have to make any payments until construction is complete.

The FHA One-Time Close loan program is identical to the regular FHA program in approval standards. Buyers must have a credit score above 620. Credit blemishes such as prior foreclosures, bankruptcies, and judgements will not necessarily disqualify an applicant. FHA also accepts a higher debt-to-income ratio than comparable loan programs, meaning a buyer’s ratio of monthly income to monthly financial obligations can be higher than comparable low-cost mortgages. The USDA Rural Loan has a maximum debt-to-income ratio of 41%, and FHA’s is nearly 10 points higher.

As with a traditional FHA loan, 3.5% of the total purchase price is due as a down payment before closing can be completed. This sum can come as a gift from a family member or approved organization, even for the One-Time Close program. These gifts can be cash or equity in a lot. If the buyer receives a down payment gift as well as seller concessions, they can theoretically come to the closing table with no money out of pocket.

The FHA One-Time Close Construction to Permanent loan is a great product that will be well-received among buyers and builders alike. Builders will be able to smoothly build and sell their product and buyers will be able to confidently purchase a home. Even though there have been new construction loans on the market for a while via local banks and mortgage providers, the new FHA OTC product is unparalleled in affordability and convenience.