How Government-Backed Construction Loans Differ From Conventional Loans
Still, one thing among all these lenders is common--for conventional loans, it's the rules of the bank that apply in addition to state/federal regulations.
These lenders do not have an overseeing federal agency that regulates the specifics of their construction loan programs outside of typical banking law.
Borrowers applying for government-backed mortgages soon learn that FHA and VA One-Time Close loans have additional requirements that must be followed.
Federal Law governs Conventional Loans
That’s not to say these banks are not regulated by federal law. Still, the government doesn't guarantee the loan programs they offer and doesn’t have any FHA, VA, or USDA guidelines for approval, payment, and administration of conventional construction loan programs.
Instead, those conventional options are guided by the law and corporate policy.
This is not so when applying for a one-time close mortgage offered by the FHA, VA, or USDA. These loan programs have specific guidelines unique to each agency.
The USDA program, for example, has a need-based element, and borrowers who don’t meet the “need” rules for USDA construction loans aren’t approved for them.
VA and FHA construction loans do not include a need-based loan approval requirement.
FHA, VA, and USDA Construction Loan FICO Score Rules
Some government-backed mortgages, including construction loans, technically permit potential borrowers to qualify with FICO scores as low as 500. The FHA loan program is a good example.
According to the FHA, a 500 FICO score isn’t left out of the running for loan approval. But on paper according to One-Time Close lender standards, those FICO scores are likely required to be in the mid 600 range instead.
What’s on paper from the VA, USDA, and FHA won’t override lender standards in this area.
Not all lenders will say no to (certain) lower FICO scores, but they will offer you higher rates in return for taking the risk of lending you the money for your new home.
A construction loan has an elevated risk for the lender even with the government guarantee made by the FHA, VA, or USDA, and your lender’s requirements are adjusted accordingly.
You can buy down those higher rates if the lender allows you to purchase discount points. Still, construction loans are a different type of purchase and not all lenders may be willing to discuss allowing lower FICO scores in exchange for buying discount points.
Property Type Rules
You can use a government-backed construction loan to build a home to live in and on paper, do so with up to four living units in mind. But the reality at the lender’s level is that single-unit homes typically get greenlit while multi-family units do not.
To build an income-generating property, you must seek a different construction mortgage and may be asked to pay higher rates. FHA and VA construction loans are for homeowners, not investors.
FHA, VA, and USDA: One-Time Close Loans
Want More Information About One-Time Close Loans?We have done extensive research on the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs) One-Time Close Construction loan programs. We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
OneTimeClose.com provides information and connects consumers to qualified One-Time Close lenders to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
Please note that investor guidelines for the FHA and VA One-Time Close Construction Program only allows for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs, including but not limited to: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes, Dome Homes, Bermed Earth Sheltered Homes, Tiny Homes, Accessory Dwelling Units, or A-Framed Homes.
All known FHA/VA One-Time Close Lenders known to our company will not allow a borrower to act as their own contractor, whatsoever. There cannot be self-builds, relative builds, or employer builds.
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1. Send your first and last name, e-mail address, and contact telephone number.
2. Tell us the city and state of the proposed property.
3. Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good - (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
4. Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio per VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $1,500,000 and review higher loan amounts on a case-by-case basis. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.
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May 21, 2025A One-Time Close (OTC) residential construction loan is a specialized financing product that combines the financing for a new home's construction phase and the permanent mortgage into a single loan with just one closing. Unlike other methods that require separate loans for building and then for long-term ownership, the OTC loan streamlines the entire process, offering a simplified and often more cost-effective approach to building a custom home than two-close construction loans.
April 29, 2025If you know about regular FHA loans for buying existing homes, the FHA OTC loan for building shares many similarities, but with some key construction-specific twists. FHA One-Time Close mortgages are backed by the Federal Housing Administration. This government insurance protects lenders if a borrower can't pay, allowing lenders to offer loans with easier qualification rules. This makes it a good option for first-time buyers or those who might find conventional loans harder to get.
April 16, 2025There are two popular ways to finance new home construction using a single loan: the FHA One-Time Close (OTC) loan and a similar Conventional single-close loan. What’s a single-close mortgage? Think of it as an "all-in-one" loan for building a house. Instead of getting one loan for the construction phase and then another separate mortgage loan once the home is finished, a single-close loan combines everything into one package. It covers land, materials, labor, permits, and builder fees.
