The design and construction of your own custom home is a fantasy for many families. Unlike the purchase of an existing house, when you build a custom home, you get to make all design decisions, from the floor plan layout to the finishes to the location. But the home build financing process can seem confusing. Conventional construction loans require multiple closings and may involve added red tape, and potentially costlier terms. That’s where the OTC loan comes into play.

This one-time close loan option combines your construction financing and your permanent mortgage all into one loan, giving you one closing and one interest rate. In this article we’ll help you understand more about how to build your dream custom home using a one-time close construction loan.

What Is a One-Time Close Construction Loan?

What is A One-Time Close Construction Loan (One Time Close)? A Single Close Construction loan is a lot less like Art Nouveau and a lot more like an art deco with an exposed steel I-beam- you see the raw construction before it’s covered over. Instead of applying and closing twice, first on the construction loan and then on the long-term mortgage, you complete the transactions simultaneously.

Here’s how it works:

• As the building is constructed, the loan pays for things like labor, material, permits and land development.
• The loan usually transitions to a permanent mortgage when construction is completed, and typically a fixed-rate loan with a term of 15 or 30 years.

That means you don’t have to requalify, pay closing costs for two separate loans or worry about interest rates rising after construction.

Why Choose a One-Time Close Construction Loan for a Custom Home?

When it comes to custom homes, flexibility, as well as financial stability is key. A one-time close loan has some advantages that make it a great choice:

• Single Closing: Avoids the hassle of applying for two separate loans.
• Interest Rate Protection: Locks in your mortgage rate upfront, protecting you from future rate hikes.
• Simplified Process: One set of paperwork, one underwriting process, and one closing.
• Cost Savings: Lower fees since you don’t have duplicate closings.
• Peace of Mind: You don’t need to worry about re-qualifying after the home is built.

Steps to Build a Custom Home with a One-Time Close Construction Loan

1. Determine Your Budget

I hope you’re not ready to design your home just yet, because before you do, you need a clear understanding of how much you can afford. Your income, credit history, debt-to-income ratio and savings will all factor into what was less than one percent of annual revenue. Establish a budget that’s achievable to make sure your project comes in on-time and on-budget.

Tip: Don’t just consider the construction, factor in land costs (if not included), and site preparation, utilities and finishing touches such as landscaping and furnishings.

2. Get Pre-Approved for a One-Time Close Loan

Pre-approval is a critical first step to getting your loan. “It tells a builder that you’re a serious buyer, and can help you exactly know what you can afford. Among the paperwork you’ll hand over during pre-approval:

• Proof of income (W-2s, tax returns, pay stubs)
• Bank statements
• Credit report
• List of debts and assets

After getting pre-approved, you’ll be able to determine a solid range that you can design within, and start the process of selecting a builder.

3. Choose the Right Location and Purchase Land

If you don’t currently own land, many one-time close loans will factor the cost of the land into the entire cost. Work with a real estate agent or land consultant to discover a land resource that is perfect for your school, work, shopping and recreation options.

Important: Your lender will also want the land to be approved, meaning it complies with zoning, access and utility requirements.

4. Select a Qualified Builder

Not all home builders offer one-time close construction loans, so it’s imperative that you find one that does. Your lender will also typically be required to sign off on the builder; that is, to verify their qualifications, licensing and so forth.

When interviewing builders, ask about:

• Past custom home projects
• Timelines and cost estimates
• Warranty policies
• Communication process during construction

You want a reliable builder who is your partner in turning your dream home into an actuality.

5. Design Your Custom Home

This is where the fun begins. With your builder (and maybe an architect) you’ll design your floor plan and choose (oversize) details like:

• Number of bedrooms and bathrooms
• Kitchen layout and appliances
• Energy-efficient systems
• Flooring, cabinets, and finishes
• Outdoor living spaces

Your design needs to be within budget. The builder submits detailed plans and specs to the lender for final approval.

6. Loan Approval and Closing

Once your builder’s plans are in, the lender will request an appraisal for the purpose of estimating the home’s future value. After it all checks out, you’ll go to a single closing. At this stage:

• Loan terms are finalized.
• Your interest rate is locked in.
• Closing costs are paid.

Once closed, construction on the project may officially commence.

7. Construction Phase

Your build will commence as per the agreed plans with your builder. The lender will dispense funds at intervals (this is what is referred to as “draws”) as the work is completed. Inspections are typically needed at every phase to make sure the work gets done right before releasing the next draw.

Typical draw stages may include:

1. Site preparation and foundation
2. Framing
3. Roofing and exterior finishes
4. Plumbing, electrical, and HVAC
5. Interior finishes
6. Final inspection and completion

Normally you pay interest only on the amount of the money disbursed during construction, not the entire loan.

8. Transition to Permanent Mortgage

Upon completion of construction and passing final inspection, the loan conveniently converts to a permanent mortgage. You will make regular principal and interest payments from this point forward, as with a traditional mortgage.

Tips for Success When Using a One-Time Close Loan

• Work with Experienced Professionals: Choose lenders and builders familiar with OTC loans.
• Stay Involved: Communicate with your builder regularly to avoid delays or misunderstandings.
• Plan for Delays: Weather or supply issues can extend timelines, build flexibility into your schedule.
• Avoid Major Changes Mid-Project: Big design changes can be costly and may require loan re-approval.
• Keep Extra Funds Available: A small contingency fund (5–10% of your budget) helps cover unexpected costs.

Pros and Cons of Using a One-Time Close Loan for a Custom Home

Pros:

• One closing saves time and money
• Interest rate protection
• Simplified process
• Builder and project approval ensures accountability

Cons:

• Limited builder flexibility (must be lender-approved)
• Less room for major design changes after closing
• Higher credit score and down payment may be required compared to some other loans

Is a One-Time Close Loan Right for You?

A one-time close construction loan might be the right loan for you if:

• Want to build a custom home without the hassle of multiple closings
• Prefer locking in your interest rate early
• Have a clear vision for your home and want a streamlined process
• Are financially prepared for construction’s unique challenges

But if you anticipate a lot of design changes during construction, or want to take a lot of time choosing a builder, a traditional construction loan makes more sense.

Final Thoughts

There are so many advantages you can enjoy when building a custom home. With a One-Time Close Construction Loan, you can simply the process, save money, and stress less with just one loan. From pre-approval, to the construction phase, and through to the permanent loan phase, the process is all in one smooth transaction.

With a well-thought out selection of a builder, a bit of budgeting and some good attention from your lender, you can finally make that dream home come true, and this time, with no headaches from traditional financing!

If you’re eager to get started on the next chapter of your life, reach out to a knowledgeable lender who specializes in one-time close construction loans. They’ll walk you through every step and help you create the home you’ve always wanted.