When it comes to the funding of your dream house, there are many loans you can consider. There are two popular financing options for the homeowner or home buyer and they’re the One-Time Close Construction Loan, a Renovation Loan. Although, they both let you tailor-make your house, these two systems serve very different functions. Knowing the differences can help you determine which would be a good fit for your loan whether you are building a new home from the ground up or renovating an existing property.

In this guide, we’re going to discuss what each loan is and how they work as well as their benefits and the significant differences that exist between the two loans you should be aware of when making a decision.

What Is a One-Time Close Construction Loan?

A One-Time Close Construction Loan There is two types of construction loans you can obtain one-time close or series (two times close). Instead of applying for two separate loans one to cover the construction phase and another to pay off the completed home you go through a single application, underwriting, and closing process.

How It Works:

1. Application and Approval – Receive approval for the total cost of the project including land, labor and materials, permits, and other associated costs.
2. Construction Period – Payments are made in draws to the builder as construction is completed.
3. Automatic Conversion to Permanent Loan – After the home is finished, the loan automatically transitions into a permanent mortgage without you having to go through another closing.

Benefits of a One-Time Close Construction Loan:

• Convenience: Only one application and closing, saving time and money.
• Locked-in Interest Rate: Many lenders allow you to lock your interest rate before construction begins.
• Cost Coverage: Can include land purchase, construction expenses, and closing costs.
• Less Risk: Eliminates the uncertainty of needing to qualify again once construction ends.

This loan suits for those who want to construct a new home from the ground up and make sure everything about the property fits their circumstances.

What Is a Renovation Loan?

A Renovation Loan is a mortgage that allows you to finance the purchase (or refinance) of a home along with the cost of renovations into one loan. Rather than paying for renovations out of pocket or taking on a series of loans, a renovation loan bundles the mortgage with the cost of upgrades.

How It Works:

• Application and Approval – You apply on the basis of what the home’s value will be “after renovation” (the ARV, as I learned in my research), not its existing value or what you paid for it.
• How Funds Are Disbursed – A portion of the loan covers acquisition or refinance of the home while a separate amount is put into an escrow account for renovation work.
• Renovation Phase — Work is done by contractors to renovate the property (the amount of work that can be done varies based on financing), and money is released in draws as work is inspected.

Benefits of a Renovation Loan:

• Buy and Fix at Once: Great for homes that need work before they can be lived in.
• More Home Value: Upgrades can increase equity.
• Broad Use: Funds can be used for cosmetic updates, energy efficient upgrades or significant structural repairs.
• Flexibility: Can be used as government-backed loans (like FHA 203(k)) or “as-is” conventional renovation programs.

This loan can be helpful for buyers who discover a home with potential but need financing in order to make it modern, safe or personalized.

One-Time Close Construction Loan vs. Renovation Loan: Key Differences

But after we’ve given a brief definition of both loans, let’s move on to the main disparities.

1. Purpose

• One-Time Close Construction Loan: For constructing a brand new home. It could also involve land acquisition.
• Renovation Loan: Meant to upgrade or fix an already built home.

2. Loan Structure

• One-Time Close Construction Loan: Short-term construction financing that’s replaced by a permanent mortgage when the home is completed.
• Renovation Loan: Purchase or refinance in tandem with renovation expense, using after-improve value.

3. Funding Process

• One Time Close: Funds are disbursed to the builder in accordance with predetermined draws.
• Renovation Loan: Proceeds are put in escrow and disbursed as renovation benchmarks are met.

4. Interest Rate

• One-Time Close: Frequently enables borrowers to lock in an interest rate at the very start.
• Renovation Loan: The rate will vary based on loan type (FHA, VA or conventional), but it’s typically higher than standard mortgages.

5. Loan Amount Basis

• One-Time Close: How much is based on your projected construction amount and home’s appraised value once the property has been built.
• Renovation Loan: Otherwise known as a “fix and flip” loan based on the property’s “after-renovation value.”

7. Closing

1. One-Time Close – Construction-to-Permanent loan for purchase of lot and construction financing only.
2. Renovation Loan: Also one closing, but it includes purchase/refinance and renovation.

8. Risk and Qualification

• One-Time Close: The borrower does not have to re-qualify after construction of the home, as is the case with two-time close loans.
• To qualify for this loan, a borrower must have planned their renovation and had it approved by the lender before starting work.

Which Loan Is Right for You?

Whether you opt for a One-Time Close Construction Loan, or prefer the Renovation Loan all depends on your objectives.

Choose a One-Time Close Construction Loan if:

• You hope to construct a new home.
• You already have land or will need to secure financing to purchase land.
• You value convenience and predictability with single closing and locked-in rate.
• You need complete control over design, layout and materials.

Choose a Renovation Loan if:

• You’re purchasing a fixer-upper and want to keep financing purchase and repairs, if possible, with a single loan.
• You would like to add value to a property you already own.
• Repairs, updates and modernization you require the financing to repair, update or modernize.
• You want to reside inside an existing neighborhood rather than on a fresh piece of land.

Pros and Cons Comparison

Here’s a quick rundown of pros and cons for each type of loan.

One-Time Close Construction Loan

Pros:

• One closing saves time and costs.
• Fixed-rate protection from the start.
• Covers land, construction, and mortgage.
• Simplifies qualification process.

Cons:

• Requires detailed planning and reliable builders.
• Construction delays could extend the timeline.
• May require higher credit scores and down payments depending on the lender.

Renovation Loan

Pros:

• Combine purchase/refinance and renovation into one loan.
• Increases home value with upgrades.
• Great for buyers who find homes in good locations but needing work.
• Can finance minor or major repairs.

Cons:

• Requires strict lender oversight during renovations.
• Interest rates may be slightly higher.
• Project delays could affect move-in timeline.
• Limited to homes that are structurally sound enough to renovate.

Final Thoughts

One-Time Close Construction Loans Both One-Time Close Construction and Renovation Loans are good options for homeowners who want more than a basic mortgage. And it all depends on where you start:

• If you’re constructing a new home from scratch, a One-Time Close Construction Loan offers convenience and peace of mind all in one approval and closing.
• If you’re purchasing or refinancing a home that needs improvements, a Renovation Loan provides the means to transform it into your dream home with just one loan for both the purchase and rehabilitation.

The decision between the two comes down to your vision, budget and timeline. Once you know the differences, you can feel more confident choosing which loan is right for your journey to becoming a homeowner.