Construction-to-Permanent · Single Close · Builder Requirements
FHA One-Time Close Construction Loan: How to Build a Home with 3.5% Down and One Closing
HUD Handbook 4000.1 — Construction-to-Permanent Financing
HUD — Section 203(b) FHA Mortgage Insurance
The FHA one-time close construction loan combines your construction financing and permanent mortgage into a single loan with one closing. You qualify once, close once, and pay 3.5% down based on the projected value of the finished home.
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Program Structure
- Single close: One application, one appraisal, one closing — the construction and permanent mortgage are combined into one loan
- Down payment: 3.5% of the total project cost including land and construction, based on the lesser of cost or appraised value
- Interest during construction: You make interest-only payments during the build period, then the loan converts to a fully amortizing FHA mortgage
- Action: Find an FHA-approved lender that offers OTC construction loans — not all FHA lenders have this product
Builder Requirements
- Licensed and insured: The builder must be a licensed general contractor with adequate liability insurance and workers compensation coverage
- HUD builder ID: Some lenders require the builder to have a HUD builder ID number, though this is not universally required
- Track record: Lenders typically require the builder to have completed at least 3 to 5 homes in the past 2 to 3 years
- Action: Confirm your builder meets the lender’s requirements before signing a construction contract
Cost Breakdown
- Upfront MIP: 1.75% of the total loan amount financed into the loan at closing
- Annual MIP: 0.55% paid monthly for the life of the loan once the permanent mortgage begins
- Construction interest: Interest accrues on disbursed funds during the build — you pay monthly on the drawn amount only
- Action: Budget for 12 to 18 months of construction interest payments in addition to your current housing cost
Timeline
- Construction period: Most FHA OTC loans allow 6 to 12 months for construction completion, with some lenders extending to 18 months
- Rate lock: Your permanent mortgage rate is typically locked at closing, not at the end of construction — this protects you from rate increases during the build
- Conversion: Once the home passes final inspection and receives a certificate of occupancy, the loan automatically converts to the permanent FHA mortgage
- Action: Build in schedule buffer — construction delays are common and exceeding the allowed build period can create loan complications
Frequently Asked Questions
Can you build on your own land with an FHA construction loan?
Can you be your own builder on an FHA construction loan?
What happens if construction takes longer than expected?
The Bottom Line Up Front
The FHA one-time close construction loan is the lowest down payment option for building a new home. At 3.5% down, it opens construction financing to borrowers who cannot afford the 10% to 20% down payment required by most conventional construction loans.
Building a home traditionally requires two separate loans — a construction loan to fund the build and a permanent mortgage to replace it after completion. Each loan has its own application, appraisal, closing costs, and qualification. The FHA one-time close eliminates the second transaction entirely. You qualify once based on the projected value of the finished home, close once, and the loan converts automatically from construction financing to a permanent FHA mortgage when the home is complete. The savings on duplicate closing costs alone can reach $5,000 to $10,000.
- Single closing means one set of closing costs instead of two — this saves thousands in duplicate appraisal, title, and origination fees
- Down payment of 3.5% is calculated on the lesser of total project cost or appraised value of the finished home — land equity counts toward the down payment
- Rate lock at closing protects you from interest rate increases during the 6 to 18-month construction period — this is a significant advantage in rising rate environments
- FHA qualification standards apply — 580 minimum credit score for 3.5% down, standard FHA DTI limits, and full income and asset documentation
How Does the FHA One-Time Close Process Work?
The process starts with simultaneous qualification of you as the borrower and your builder as the contractor. The loan is underwritten based on the plans, specifications, and projected value of the completed home.
After closing, the lender disburses construction funds to the builder in draws — typically five to seven draw stages corresponding to construction milestones like foundation, framing, roofing, mechanical systems, and finishing. You make interest-only payments on the disbursed amount during construction. Once the home passes final inspection and receives a certificate of occupancy, the loan automatically converts to the permanent FHA mortgage with full principal and interest payments.
- Pre-qualification: the lender evaluates your credit, income, and assets using standard FHA guidelines, plus reviews the construction plans and builder qualifications
- Appraisal: the FHA appraiser values the property based on the plans and specifications as if the home were already completed — this is called a prospective value appraisal
- Closing: you close on the combined construction and permanent loan — the rate is locked, the terms are set, and construction can begin
- Construction draws: the builder submits draw requests as milestones are completed — the lender or a third-party inspector verifies completion before releasing funds
- Conversion: when the home passes final inspection, the loan converts automatically to the permanent mortgage — no second closing, no second qualification
Process Watchpoint
The draw process is where most construction loan problems start. Each draw requires an inspection to verify the work is complete before funds are released. If the builder’s work does not pass inspection or if the project falls behind schedule, draws are delayed. Make sure your construction contract has clear milestones that align with the lender’s draw schedule.
What Are the Qualification Requirements?
You need to qualify under standard FHA guidelines, and your builder must meet the lender’s contractor requirements. Both the borrower and the builder are underwritten as part of the same loan application.
The borrower requirements are identical to a standard FHA purchase loan — 580 minimum credit score for 3.5% down, income verification, employment history, and DTI within TOTAL Scorecard parameters. The additional layer is builder qualification: the lender evaluates the contractor’s license, insurance, financial stability, and construction track record before approving the loan.
- Credit score: 580 minimum for 3.5% down payment — some lenders have OTC overlays that require 620 or 640 for construction products specifically
- DTI ratio: standard FHA limits apply — TOTAL Scorecard can approve up to 56.99% with compensating factors, but lender overlays for OTC products often cap at 45% to 50%
- Down payment: 3.5% of the lesser of total acquisition cost (land plus construction) or appraised value of the completed home — land equity counts toward the required down payment
- Builder: must be a licensed general contractor with minimum 2 to 3 years of homebuilding experience, adequate liability insurance, and workers compensation coverage
- Plans and specs: detailed construction plans, specifications, and a line-item budget must be submitted with the loan application for the appraiser and underwriter to review
One-Time Close vs Two-Close Construction: Which Is Better?
One-time close eliminates the risk and cost of double qualification. Two-close gives you more flexibility to shop rates for the permanent mortgage after construction is complete. For most FHA borrowers, one-time close is the better option.
In a two-close structure, you take a short-term construction loan from one lender, then apply for a permanent mortgage with potentially a different lender after the home is finished. This means qualifying twice, paying closing costs twice, and taking the risk that rates or your financial situation change between closings. For borrowers with strong credit who want to shop for the best permanent rate, two-close can work. For FHA borrowers who need the certainty of a single qualification and locked rate, one-time close removes significant risk.
- One-time close: one qualification, one closing, one set of closing costs — the rate is locked at closing and the loan converts automatically after construction
- Two-close: two qualifications, two closings, two sets of closing costs — more flexibility to shop rates for the permanent loan but higher total cost and qualification risk
- Rate risk: one-time close locks your rate at the start of construction, protecting you from increases — two-close exposes you to rate changes during the build period
- Qualification risk: if your income, credit, or employment changes during construction, a two-close borrower may not qualify for the permanent mortgage — one-time close eliminates this risk
| Feature | FHA One-Time Close | Two-Close Construction |
|---|---|---|
| Closings | 1 | 2 |
| Qualification events | 1 | 2 |
| Closing costs | One set | Two sets ($5K-$10K more) |
| Rate lock | At initial closing | At second closing (rate risk) |
| Down payment | 3.5% FHA | 10-20% construction + 3-20% permanent |
| Rate flexibility | Locked early | Shop at conversion |
Lender Reality Check
Not all FHA lenders offer one-time close construction products. This is a specialty product that requires the lender to manage construction draws, builder qualification, and conversion — many smaller lenders do not have the infrastructure. Start by asking lenders specifically whether they offer FHA OTC before you fall in love with building plans and a builder.
The Bottom Line
The FHA one-time close construction loan is the most accessible path to building a new home for borrowers with limited down payment funds and credit scores between 580 and 680. Single closing, rate lock protection, and 3.5% down make it the lowest-barrier construction financing option available.
The trade-offs are permanent MIP, limited lender availability, and the need for a qualified builder who meets the lender’s contractor standards. Start your search by finding an FHA lender that offers one-time close products in your area, then work with that lender to identify builders who meet their requirements. The loan structure protects you from the biggest risks in new construction — rate increases during the build and the risk of not qualifying for the permanent mortgage — which makes it worth the slightly higher long-term cost of FHA MIP.
Frequently Asked Questions
Can you include land purchase in an FHA one-time close loan?
Yes. The loan can finance the land acquisition, construction costs, and the permanent mortgage in a single transaction. If you need to purchase the land as part of the project, the total acquisition cost — land plus construction — is the basis for the loan amount and down payment calculation.
What are the FHA loan limits for construction loans?
FHA one-time close loans are subject to the same FHA loan limits as standard FHA purchase loans. In 2026, the FHA floor limit is $541,287 and the ceiling in high-cost areas is $1,249,125. Your total loan amount including land, construction, and financed MIP cannot exceed the limit for your county.
Can you use an FHA one-time close for a manufactured home?
FHA offers construction-to-permanent financing for manufactured homes that are built to HUD code and placed on a permanent foundation. The requirements are more restrictive than for site-built homes, and fewer lenders offer this specific product. Confirm with your lender that their OTC program covers manufactured housing.
How are construction draws managed?
The builder submits draw requests at predetermined construction milestones. The lender sends an inspector to verify the work is complete before releasing funds. Typical draw stages include foundation, framing, roofing, mechanical rough-in, drywall, and final completion. The number of draws varies by lender.
What happens if the builder goes out of business during construction?
This is the biggest risk in construction lending. The lender will work with you to find a replacement builder, and the remaining undisbursed funds can be redirected to the new contractor. Builder qualification upfront — including financial stability review — is designed to minimize this risk. Some lenders also require performance bonds on larger projects.
Can you make changes to the plans after closing?
Minor changes are generally allowed with lender approval. Major changes that affect the home’s value, square footage, or structural design may require a revised appraisal and potentially a loan modification. Discuss any planned changes with your lender before executing them with the builder.
Do you make mortgage payments during construction?
You make interest-only payments on the disbursed portion of the loan during the construction period. These payments increase as more draws are made because the outstanding balance grows. Full principal and interest payments begin after the home is completed and the loan converts to the permanent mortgage.
Is the FHA one-time close the same as an FHA 203k?
No. The FHA 203k is a renovation loan for existing homes that need repairs or improvements. The FHA one-time close is for new construction on vacant land. Both are FHA products, but they serve different purposes and have different requirements.