One-Time Close (OTC) Construction Loans Explained Without the Headache
Building a Home Without the “What If?” Panic
If you’re thinking about building a home, you’ve probably heard horror stories:
- “Rates jumped before we finished.”
- “We had to reapply.”
- “The builder needed more money.”
- “The loan fell apart at the end.”
A One-Time-Close (OTC) Construction Loan is designed to avoid all of that.
Building a home should feel exciting—not like you accidentally signed up for a second job filled with paperwork, stress, and financial curveballs.
That’s where One-Time-Close (OTC) construction loans come in. When structured correctly, they’re hands-down one of the smartest ways to build. When structured poorly? They’re deal-killers.
Let’s break this down:
What Is a One-Time-Close Construction Loan?
An OTC loan combines:
- The land (if needed)
- Construction financing
- The permanent mortgage
…into one single loan with one closing.
That means:
- One application
- One underwriting approval
- One set of closing costs
- One qualification (no re-qualifying after the build)
- No second closing when the home is finished
When construction is complete, the loan automatically converts to your permanent mortgage. No surprises. No scrambling. No “hope rates didn’t spike” moment.
Loan Types That Can Be Structured as OTC
Yes—buyers have options. Real ones.
Conventional OTC
- Primary residence (sometimes second homes)
- Strong credit and income required
- I offer 5% down options
- Best for well-qualified buyers who want flexibility
FHA One-Time-Close
- Primary residence only
- Lower down payment
- More flexible credit guidelines
- Great for first-time buyers building new
VA One-Time-Close
- Eligible Veterans only
- Potentially zero down
- No PMI
- Land + build can be wrapped together
- Strict builder and appraisal requirements (worth it when done right)
USDA One-Time-Close 🌾
- Primary residence in USDA-eligible areas
- Zero down
- Income limits apply
- Modest, reasonable home designs
- One of the most underused build options out there
The Contingency Fund
Most OTC loans includes a contingency reserve—and for good reason.
Typical requirement:
- 5%–10% of total construction costs
- If the lender does not indicate this as a requirement, they may check the contract and project plans from the builder to find it 'baked in'. However, a contingency is usually somewhere in the project.
This fund covers:
- Material price increases
- Weather delays
- Change orders
- Unexpected site issues
Unused contingency funds usually:
- Reduce your loan balance
- Or are handled per investor rules such as a reduction in the principal.
🚩 If your loan officer glosses over contingency funds early—run... they may not understand this or the lender specific guidelines.
Already Own the Land? Here’s the Advantage
If you already own land, an OTC loan works like a refinance:
- Your land value is rolled into the construction loan
- Existing land equity can:
- Cover some or all of the down payment
- Reduce cash needed to close
- Improve overall loan terms
Many buyers are shocked to learn they can build with little to no additional cash because the land is already doing the heavy lifting.
Don’t Own the Land Yet? Order Matters.
Option 1: Buy Land + Build Together (Best Strategy)
- One OTC loan
- One closing
- One down payment
- VA → potentially zero down total
- USDA → zero down if eligible
- Conventional → 5% down option available
This is usually the cleanest, most cost-effective route.
Option 2: Buy Land First, Build Later
- Often requires 20–30% down on land
- Second loan later to build
- More cash
- More closings
- More risk
If buyers can bundle land + build together, they usually should.
Manufactured Homes & OTC Loans
Yes—manufactured homes can qualify when done correctly. Some lenders have specific requirements related to size such as double-wide vs. single-wide.
Typically allowed:
- Brand-new, never installed
- Permanently affixed to the land
- HUD-compliant
- Classified as real property
- Approved foundation system
Commonly NOT allowed:
- Used manufactured homes
- Homes moved from another site
- Temporary foundations
- “Mobile homes” without permanent setup
Each loan program has very specific rules here—this is not a DIY scenario.
Structures That May Kill the Deal 🚫
Not all cool builds are financeable.
Common red flags:
- Barndominiums (sometimes allowed, often restricted)
- Shipping container homes
- Earth or underground homes
- Log homes (limited acceptance)
- Mixed-use properties
- Highly custom designs with no comparable sales
If the appraiser can’t support the value, the deal stops—no matter how beautiful the plans are.
Builder Red Flags That Sink OTC Deals 🚩
This is where most OTC loans die.
Watch out for builders who:
- Can’t provide a fixed-price contract
- Don’t understand draw schedules
- Lack proper licensing or insurance
- Have weak financials
- Push unrealistic timelines
- Refuse lender paperwork
Great builders build homes.
Great OTC builders also build paper trails.
**If you have already selected a builder, we can generally assist with getting that builder enrolled and vetted either directly with a lender, or with a risk management resource that will may be part of the entire process and over-site for draws to protect YOU and the lender.
Rate-Lock Strategies During Construction 🔒
This part matters—a lot.
Common options include:
- Extended rate locks (with or without float-down options)
- Construction-phase interest only, then fixed or ARM options
- Market-based conversion strategies such as a 'float down'.
The right approach depends on:
- Build timeline
- Market conditions
- Buyer risk tolerance
A good lender talks about this before the plans are finalized—not after drywall goes up.
OTC vs Construction-to-Permanent (Two-Time-Close)
Here’s the straight comparison:
One-Time-Close (OTC)
- One closing
- One qualification
- One set of costs
- Rate strategy locked early
- Less risk, more predictability
Construction-to-Perm (Two Closings)
- Two closings
- Two underwriting approvals
- Two sets of costs
- Rate risk at completion
- More flexibility—but more exposure
For buyers who value certainty and simplicity, OTC usually wins.
VA & USDA Appraisal Landmines to Avoid 💣
These programs are powerful—but picky.
Common appraisal killers:
- Over-customized homes for the area
- Inadequate comparable sales
- Non-allowable structures
- Builder plans that don't match specs
- Rural properties with inflated expectations
The fix?
Structure the project to the
market, not just the dream.
Final Word from a Mortgage Pro Who’s Seen It All
A One-Time-Close construction loan is not “hard.”
It’s just unforgiving if done incorrectly.
When structured right, OTC loans:
- Reduce cash needed
- Eliminate re-qualification risk
- Protect buyers during construction
- Make building feel exciting—not exhausting
The smartest move?
Map the financing
before you buy land, choose a builder, or fall in love with plans.
Because the house can be custom.
The loan strategy must be intentional.
Bottom line:
Build the loan plan first.
Then build the house.
Theresa Rolen – The Huntress Home Loan Pro
Mortgage Loan Originator | Construction & VA Specialist
NMLS #2249004 | Summit Lending NMLS #1850081
Phone:913-705-0049
Email:Theresa@SummitLendingUSA.com
Book a 1:1 Construction Strategy Call:
https://calendly.com/theresa-summitlending
