What Is a One-Time Close Construction Loan and How Does It Work?

Building a home gives you the opportunity to create a property around your needs instead of choosing from existing homes on the market. But financing a new construction project can be more complicated than obtaining a mortgage for a completed property.

You may need money to purchase the land, pay contractors, cover construction costs, and eventually finance the finished home.

A One-Time Close Construction Loan can simplify this process by combining construction financing and permanent mortgage financing into a single transaction.

If you’re considering building a home, understanding how this type of financing works can help you prepare before selecting land or beginning construction.

What Is a One-Time Close Construction Loan?

A One-Time Close Construction Loan, sometimes referred to as a construction-to-permanent loan, is designed to finance the construction of a new home and then transition into permanent mortgage financing after construction is completed.

Instead of arranging separate loans for the construction phase and the finished home, eligible borrowers may be able to complete the financing through one closing.

The specific structure, qualification requirements, and construction process depend on the lender and loan program.

How Is It Different From a Traditional Construction Loan?

Traditional construction financing can sometimes involve two separate transactions.

The first loan finances construction.

After the home is completed, the borrower may then need to qualify for another mortgage that pays off the construction loan and becomes the permanent home loan.

That approach can potentially involve:

• Two applications
• Two qualification processes
• Two sets of loan documents
• Multiple closings
• Additional closing expenses

A One-Time Close structure is intended to combine these stages into one financing process.

How Does the Process Work?

Although requirements vary, financing a newly constructed home generally involves several stages.

1. Mortgage Qualification

Before construction begins, the lender reviews your financial qualifications.

This may include:

• Income
• Employment
• Credit
• Assets
• Existing debts
• Down payment or equity
• Other applicable financial information

Getting qualified early can help establish a realistic construction budget.

2. Builder and Project Review

Financing a home that does not exist yet requires the lender to evaluate more than the borrower.

The construction project may also need to meet specific requirements.

Depending on the program, this can involve reviewing:

• Builder qualifications
• Construction plans
• Building specifications
• Construction contract
• Project budget
• Estimated timeline
• Required permits

Borrowers should therefore discuss financing before committing to a builder or construction contract.

3. Property Appraisal

How do you appraise a home that has not been built?

For construction financing, an appraiser may evaluate the plans, specifications, land, comparable properties, and other relevant information to estimate the value of the property when construction is completed.

This projected completed value can play an important role in determining the financing available for the project.

4. Closing

Once the borrower, builder, property, and project satisfy the applicable requirements, the loan can proceed to closing.

With a One-Time Close Construction Loan, this is where one of the major differences becomes apparent.

Instead of planning another mortgage closing after construction, the permanent financing component is incorporated into the original transaction according to the program terms.

How Are Construction Funds Paid?

Construction funds generally are not provided to the borrower as one unrestricted lump sum.

Instead, funds are commonly distributed through a draw process as construction progresses.

For example, draws may correspond with stages such as:

• Site preparation
• Foundation
• Framing
• Roofing
• Plumbing and electrical work
• Interior construction
• Final completion

The exact draw schedule depends on the construction agreement and financing program.

What Is a Construction Draw?

A construction draw is a payment released from the construction financing to cover approved work that has been completed.

Before funds are released, documentation or inspections may be required to confirm construction progress.

This process helps ensure that financing is being used according to the approved construction budget and project plan.

Do You Need to Own the Land Already?

Not necessarily.

Some borrowers already own the lot where they plan to build, while others need financing to acquire the property as part of the project.

How land is handled depends on the specific loan structure.

If you already own land, the equity you have in the property may also be considered as part of the overall financing scenario, subject to lender guidelines.

Discuss the land with your mortgage professional before making assumptions about how it will affect the loan.

Why Is the Builder Important?

With an existing home purchase, the lender primarily evaluates the property and borrower.

New construction adds another important component: the builder.

The lender needs confidence that the project can be completed according to the approved plans, budget, and schedule.

Builder requirements may involve reviewing items such as:

• Experience
• Licensing
• Insurance
• Financial information
• Construction history
• Contracts

Specific requirements vary considerably by program.

Can You Be Your Own General Contractor?

Borrowers interested in building their own homes sometimes ask whether they can act as their own general contractor.

Some construction loan programs may have restrictions regarding owner-builders or require qualified contractors.

Because requirements vary, discuss your plans with the lender before assuming that performing or managing the construction yourself will be permitted.

What Happens While the Home Is Being Built?

During construction, the loan operates differently from a standard mortgage on a completed property.

Funds are released as approved work progresses, and inspections may occur at various stages.

Borrowers should maintain communication with:

• Their lender
• Builder
• Construction professionals
• Other parties involved in the project

Changes to the original plans or construction budget should also be discussed before work proceeds because significant modifications could affect financing.

What Happens When Construction Is Finished?

After construction is completed, final requirements must generally be satisfied.

Depending on the program and property, these could include:

• Final inspection
• Confirmation that construction is complete
• Required occupancy documentation
• Verification that approved work was finished
• Final construction accounting

The financing can then transition according to the permanent mortgage terms established by the loan.

What Are the Potential Benefits of a One-Time Close?

For eligible borrowers, potential advantages may include:

• One primary financing process
• One closing rather than separate construction and permanent loan closings
• Reduced need to reapply for permanent financing
• A more streamlined transition from construction to homeownership
• Greater clarity about long-term financing before construction begins

Actual benefits depend on the particular loan structure and borrower circumstances.

What Can Cause Construction Costs to Increase?

Building a home requires careful budgeting because unexpected expenses can occur.

Potential causes of additional costs include:

• Material price changes
• Design modifications
• Site preparation issues
• Construction delays
• Upgraded finishes
• Labour expenses
• Unexpected property conditions

A realistic construction budget should include appropriate planning for potential changes.

Avoid Making Major Financial Changes During Construction

Building a home can take months, and borrowers should remember that their financial situation remains important throughout the process.

Before making significant financial changes, speak with your mortgage professional.

Examples include:

• Financing a new vehicle
• Opening substantial new credit
• Changing employment
• Taking on significant additional debt
• Moving large amounts of money without documentation

Maintaining financial stability can help avoid complications while construction is underway.

Is Building a Home Right for You?

New construction can provide significant flexibility, but it also requires more planning than purchasing an existing home.

Before deciding to build, consider:

• Your total budget
• Land availability
• Builder selection
• Construction timeline
• Desired home features
• Potential cost overruns
• Where you will live during construction
• Your long-term plans for the property

Understanding both the financial and practical sides of building can help you determine whether new construction fits your goals.

How OM Mortgage Helps With New Construction Financing

OM Mortgage offers One-Time Close Construction financing as part of its broader range of home loan programs, alongside Conventional, FHA, VA, Jumbo, Renovation, Non-QM, and other specialty mortgage solutions.

For borrowers considering building a home, the team can help evaluate the proposed project, explain financing requirements, and identify available mortgage options based on the borrower’s financial situation and construction plans.

Starting the financing conversation before purchasing land or signing a construction contract can help you better understand your budget and the requirements your project will need to meet.

Conclusion

Building a home involves more moving parts than purchasing an existing property, and financing is one of the most important pieces to organize early.

A One-Time Close Construction Loan may simplify the process by combining construction and permanent mortgage financing into one transaction for eligible borrowers.

Before purchasing land, selecting a builder, or finalizing construction plans, speak with a mortgage professional who understands construction financing.

Knowing your financing requirements from the beginning can help you establish a realistic budget, choose an appropriate builder, and move through the construction process with fewer financial surprises.