It is new home can be one of the most exciting occasions in life. But financing can be tricky, especially if you’re accustomed the combined construction loan/mortgage process. That’s where a One-Time Close (OTC) Construction Loan comes in.

Also referred to as a construction-to-permanent loan, borrowers have the ability to seamlessly convert one loan into another, rolling the construction loan and permanent mortgage into one. Two closings are not required, less paper work is generated, and this can save time and money. But as with any financial product, OTC construction loans have their pluses and minuses.

In this guide, we’ll cover the pros and cons of one-time close construction loans so you can determine if this type of loan is the best choice for your home construction project.

What Is a One-Time Close Construction Loan?

A One-Time Close Construction Loan is a construction mortgage that could help you have your dream home built and secure a long-term mortgage from their website right after. Rather than opening a short-term construction loan that must be paid off and then close on a separate mortgage, borrowers only complete one application.

The arrangement generally goes like this:

• The lender disburses money during construction in draws to builders and contractors.
• After the home is finished, the loan automatically converts to a permanent mortgage with a fixed number of monthly payments.

That convenience is often a siren song for many borrowers, especially those who want to sidestep the uncertainty of requalifying for a loan once the construction is done.

Pros of One-Time Close Construction Loans

1. Single Closing Saves Time and Money

One-time close is actually something unique in that the traditional closing is only needed once. Traditional construction loans require a loan for the land, and construction loan for the build and a separate permanent mortgage Loan. And every closing brings fees, forms and the possibility of delays.

By combining the two stages into one closing, borrowers avoid double closing costs, cut down on logistical headaches, and expedite the financing process.

2. Interest Rate Protection

There’s always a possibility interest rates could rise between the time the construction is complete and you are prepared to apply for a permanent mortgage if you apply for a traditional two-step loan. With a one-time close loan, you close on your mortgage rate upfront.

This provides peace of mind and financial certainty for borrowers, particularly at a time of increasing interest rates.

3. No Requalification Required

Borrowers of a two-time close loan usually must requalify once the home is completed. That might be a problem, however, if your financial circumstances change, e.g. a job loss, tumbling credit scores or surprise debt.

And you won’t need to qualify again with a one-time close loan. Eligibility is established at the outset, and the loan is automatically converted, following the construction process, to permanent financing.

4. Simplified Process

Dealing with two loans is twice the paperwork, twice the coordination, potentially twice the stress. With a one-time close loan, the process is streamlined, so you get all the benefits of construction with just one loan package.

This simplified process minimizes the potential for misunderstandings among lenders, builders, and borrowers enabling our borrowers to focus on building their homes while leaving the details of financing to us.

5. Potential Cost Savings

Since you are only paying one set of closing costs and fees, the total upfront expense may be lower than that of two separate loans. In addition, getting a guaranteed rate early can save tens of thousands of dollars in interest if that rate goes up while the house is being built.

6. Available for Different Loan Programs

One-time close financing is often provided by lenders who offer FHA loans, VA loans, and conventional loans. This allows a multitude of borrowers, ranging from veterans to first-time homebuyers, to access the program.

Cons of One-Time Close Construction Loans

As much as these perks are alluring, it’s also crucial to acknowledge the downside.

1. Stricter Qualification Requirements

Since lenders are assuming more risk by lumping the construction loan and permanent mortgage together, the underwriting can be more stringent. Borrowers might have to meet stricter credit-score, debt-to-income-ratio and employment requirements to qualify.

2. Limited Flexibility for Changes

When you commit to a loan, reversing it can be difficult. If the cost of building ends up being more than your initial budget because of changes to plans, lack of materials or unexpected problems, you could have to fork out extra cash to make up the difference.

With a two-time close, you may also have some flexibility to tweak your financing in between stages.

3. Fewer Lender Options

One-time close loans are not available through all banks and mortgage companies. As a result of their specialized-focus and risky carry-factor, some lenders shun them outright. That might restrict your selection of lenders, and, possibly, your ability to shop around for the most competitive rates and terms.

4. Potentially Higher Interest Rates

It’s important to understand that one-time close loan interest rates may be slightly higher than those for the more common two-time close mortgages, depending on the lender. This is in part to compensate for the extra risk they absorb by committing upfront. Even a tiny difference in rates adds up over the life of the loan.

5. Complex Draw Process

Money is paid out in chunks, or draws, as projects are built to cover contractors and suppliers. Carrington: This is common with construction loans, however, it can result in disputes or delays if there are inspections or approvals required at each draw. Borrowers might find this cumbersome, especially if it slows down building.

6. Higher Upfront Costs in Some Cases

While one-time close loans are cost-effective and allow savings on closing costs, there may be a larger upfront reserve to carry or more strict down payment requirements to meet on top of what would be required on the average construction loan. For instance, some lenders might demand bigger startup capital to avert hazards in the course of construction.

Who Should Consider a One-Time Close Construction Loan?

A one-time close construction loan is another option.

• Borrowers who want simplicity and prefer to deal with one loan rather than two.
• Homebuyers concerned about interest rates who want to lock in a rate upfront.
• Veterans and military families using VA one-time close loans, which often come with favorable terms and no down payment.
• Borrowers with stable finances who don’t anticipate needing to change their loan terms or budget mid-project.

But if you want the flexibility of shopping around between construction and permanent loans, or if you anticipate that modifications will push up the price of your project, a two-time close loan could be a better option for you.

Tips for Borrowers Considering a One-Time Close Loan

Shop Around for Lenders, There are fewer lenders that offer OTC loans, scour the ones that do to ensure you get the best rates and terms.

• Budget Wisely – Always consider having a cushion when it comes to unforeseen expenses that may be related to your construction plans.
• Verify eligibility early – Learn credit score guidelines, debt ratios restrictions and down payment requirements.
• Associate with Experienced Builders – Some lenders will preapprove the builder before the loan is disbursed. Go with a trusted vendor. That’s just from my experience – Good luck!
• Know the Draw – Ask your lender how and when funds are disbursed to ensure timely progress.

Final Thoughts

A One-Time Close Construction Loan can help you build your dream home without working with multiple lenders or dealing with dual loans by providing both your construction and permanent mortgage together in a single transaction. The benefits, saving on closing costs, not having to requalify and locking in interest rates, are big.

Still, borrowers will want to compare the advantages with the tradeoffs, such as more stringent qualification requirements, lack of lender competition and less flexibility for a mid-project change up.

And whether the loan makes sense for you depends largely on your financial situation (or stability), your long-term plans (toward a move or a refinance, for example) and your personal preference between simplicity and flexibility. By weighing up the advantages and disadvantages of one-time close construction loans, you can make a well-informed decision that will advance your homeownership aspirations.