The OTC product is a loan that covers both the purchase and construction of a home. In order to meet the FHA’s requirements, the loan must include separate appraisals of the land and the completed home.
The first step in pursuing an FHA One-Time Close loan is for the borrower to select a qualified builder or contractor. The FHA requires this builder or contractor to have a valid license and appropriate insurance policies. Additionally, the contractor must have a minimum of two years of experience working with similar projects.
Once the builder or contractor is selected, the lender arranges for an appraiser to inspect the land. This appraisal is often referred to as the “Land Appraisal” and will assess the value of the land as it currently stands. The buyer must have sufficient funds to cover not only the purchase price of the land but also any improvements that will be made.
The second appraisal is conducted after the house has been built. This appraisal is called the “Construction Appraisal” and evaluates the completed home. This appraisal will consider features such as additional electric wiring, plumbing, flooring, roofing, windows, and any other additional installations.
The appraised value of the land and the completed home are then combined to determine the total value of the home. This number will be used by the FHA to help the borrower determine the maximum amount they can borrow for their loan.
For an FHA One-Time Close loan, the appraised value of the home is used to determine the maximum loan amount. The borrower is responsible for paying all closing costs; however, there is a limit to how much a borrower can pay. As such, the FHA requires the lender to disclose all costs associated with the loan prior to approval.
In summary, obtaining an FHA One-Time Close loan requires separate appraisals for the land and the completed home. The appraised value of the land and the completed home are combined to determine the total value of the home. This number will be used by the FHA to help the borrower determine the maximum amount they can borrow for their loan. Additionally, the borrower is responsible for paying all closing costs, though there is a limit to how much they can pay.
The Federal Housing Administration’s (FHA) One-Time Close mortgage product enables buyers to purchase land and construct a new home. Consequently, it is important to understand the different requirements and the appraisals that are needed for FHA One-Time Close loans. In order to do so, a borrower must first pick a qualified builder or contractor with a valid license and sufficient insurance policies who has had at least two years of experience working on similar projects.
After the builder or contractor is selected, the lender arranges for an appraiser to inspect the land to assess the current value of the land and associated improvements. This appraisal is known as the ‘Land Appraisal’ and serves as the basis for the total loan amount. The lender will also arrange for a ‘Construction Appraisal’ which evaluates the completed home. This appraisal will take into consideration additional electric wiring, plumbing, flooring, roofing and window installation. The value of the land and the completed home are combined to form the total value of the home which the FHA will use to determine the maximum loan amount available.
The borrower is responsible for paying all closing costs associated with the purchase and construction of the home. However, the FHA imposes a limit on the amount of closing costs that a borrower can pay. For this reason, the FHA requires the lender to provide disclosure of all costs upfront prior to approval of the loan.
Therefore, the FHA’s One-Time Close mortgage product provides purchasers the ability to acquire land and construct a new home. by following the guidelines set forward by the FHA and undergoing the two appraisals, a borrower will be positioned to determine the maximum loan amount available. It is then the responsibility of the borrower to pay all closing costs for the purchase and construction of the home, subject to the limits imposed by the FHA.
This article was contributed on Dec 02, 2023
