How One-Time Close Construction Loans Work

A One-Time Close construction loan eliminates the hassle of qualifying twice for financing. Instead of getting a construction loan first and then applying for a separate mortgage later, you close once at the beginning and your loan automatically converts to permanent financing when construction completes.

During construction, you make interest-only payments on the amount you've drawn. The construction phase operates as a temporary loan that's exempt from ability-to-repay rules under federal regulations. Once construction finishes and passes inspection, your loan converts to a standard mortgage with principal and interest payments.

Say you're building a $400,000 home with a $320,000 loan amount. You close on the One-Time Close loan before breaking ground. As construction progresses and you draw funds, you pay interest only on the outstanding balance. When the house is complete and you get your certificate of occupancy, the loan automatically becomes a 30-year fixed mortgage at the rate you locked in originally.

Two Ways to Structure the Conversion

Fannie Mae allows two documentation structures for One-Time Close loans. The automatic conversion method requires no paperwork changes when construction completes. The modification agreement method lets you adjust certain loan terms during the conversion process.

With automatic conversion, your loan terms stay exactly the same from construction through permanent financing. Your interest rate, loan amount, and payment structure don't change. This works well when you're confident about your final loan terms upfront.

The modification agreement approach gives you flexibility to adjust your interest rate, loan balance, payment amount, loan term, or switch from an adjustable rate to a fixed rate. You can only modify these terms once, and any changes may require resubmitting your loan through Fannie Mae's automated underwriting system.

If construction costs increase and you need to borrow more money, the modification agreement lets you increase your loan balance to cover documented cost overruns. However, you can't use this flexibility to take cash out for other purposes.

Purchase vs. Refinance Classification

Whether your One-Time Close loan counts as a purchase or refinance depends on who owned the land before construction started. If you didn't own the property before closing on the construction loan, it's classified as a purchase transaction.

If you already owned the land or existing home before starting the One-Time Close process, your loan becomes a refinance transaction. This matters because refinance loans have different requirements and restrictions.

For refinance transactions, you must have owned the property for at least six months before the permanent financing becomes effective, unless you inherited the property or received it through a legal judgment like a divorce decree.

Required Documents and Evidence

Your lender needs the standard mortgage documentation plus construction-specific paperwork. The loan file must include a uniform security instrument, the appropriate uniform note, and an addendum covering the construction phase terms.

For modification agreement structures, you'll also need the specific Fannie Mae modification form. Form 5166 handles fixed-rate conversions, while Form 5167 covers adjustable-rate mortgages.

Construction documentation includes detailed plans and specifications, contractor agreements, and cost breakdowns. Your lender will verify that all construction costs represent items commonly included in similar projects in your area. Personal property like furniture and electronics can't be included in construction costs.

The age requirements for financial documentation are more flexible than standard mortgages. Income, employment, and credit reports can be up to 540 days old for certain loan types, as long as they were no more than 120 days old when you first applied for construction financing.

Employment and Income Verification Rules

Even though your financial documents can be older, your lender must verify your employment within 10 days of closing on the construction loan. This employment verification follows the same process as standard mortgages but uses the construction loan closing date instead of the permanent loan conversion date.

Self-employed borrowers need verification that their business still exists within 120 days of the construction loan closing. Your lender will check business licenses, tax filings, or other evidence that you're still operating.

Asset documentation follows similar rules. Your bank statements and investment account records can be up to 120 days old as of the construction closing date. You only need updated asset verification if you need additional funds at conversion or if underwriting requirements change during construction.

The Two-Appraisal Process

One-Time Close loans require two separate appraisals. The first appraisal provides an "as completed" value based on your construction plans and specifications. This appraisal happens before construction starts and establishes the value used for your loan-to-value ratio calculations.

The appraiser reviews your architectural plans, specifications, and material lists to estimate what the finished home will be worth. This "subject to completion" appraisal assumes all work will be done according to the submitted plans.

After construction finishes, your lender orders an appraisal update using Form 442. This second appraisal confirms that construction was completed according to the original plans and provides the actual finished value. The appraiser physically inspects the completed work and verifies it matches the specifications.

If the completion appraisal shows the property value has declined from the original estimate, your lender must order a full new appraisal. This protects both you and the lender from overvaluing the finished property.

Timing Requirements for Appraisals

The timing rules for appraisals depend on whether you're doing new construction or renovation. For construction-to-permanent loans, the initial "as completed" appraisal must be no more than four months old when you close on the construction financing.

Renovation loans get more time. The initial appraisal can be up to 12 months old when the permanent financing becomes effective. This longer timeframe recognizes that renovation projects often take more time to plan and permit than new construction.

The completion appraisal update must be no more than 120 days old when your loan converts to permanent financing. This ensures the final value assessment reflects current market conditions.

Value Calculations for Loan-to-Value Ratios

How your lender calculates the property value for loan-to-value purposes depends on whether your loan is a purchase or refinance transaction. Purchase transactions use the lesser of the total project cost or the appraised "as completed" value.

For new construction purchases, total project cost includes the land purchase price plus all construction costs. If you received the land as a gift or inheritance, the appraised land value can substitute for a purchase price.

Renovation purchases combine the property purchase price with renovation costs. Only costs for work commonly done in your area count toward the total. You can't include luxury items or personal property that wouldn't typically be part of similar renovation projects.

Refinance transactions use the appraised "as completed" value regardless of your actual costs. This can work in your favor if you're doing much of the work yourself or getting below-market pricing from contractors.

Common Complications and Gotchas

Construction delays can create documentation age problems. If your project takes longer than expected, some of your financial documents might expire before conversion. Plan for potential delays when gathering your initial paperwork.

Cost overruns require careful documentation. If construction costs exceed your original budget, you can increase your loan amount through a modification agreement, but you need detailed records showing where the extra money went. Undocumented cost increases can't be financed.

Changes to your financial situation during construction can complicate conversion. If you change jobs, get divorced, or have other major life changes during the construction phase, your lender may need to re-underwrite your loan before conversion.

Market value declines pose another risk. If property values drop in your area during construction, your completion appraisal might come in lower than expected. This could affect your loan-to-value ratio and potentially require mortgage insurance or additional down payment.

Some borrowers assume they can make unlimited changes to their construction plans during the building process. However, significant changes from the original specifications may require a new appraisal and could affect your loan approval.

References

For the official guidelines, see 4602.2: One-Time Close transactions in the Fannie Mae Selling Guide.

Mortgage guidelines change. Stay current.

Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.

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Original Freddie Mac Guideline Text

This section is effective for Mortgages with Application Received Dates on or after February 4, 2026. For Mortgages with Application Received Dates prior to February 4, 2026,

see prior version of Chapter 4602

Bulletin 2025-7

, which announced the policy requirements for Uniform Appraisal Dataset (UAD) 3.6. Sellers may submit to the Uniform Collateral Data Portal

appraisal reports that use UAD 3.6 before the mandatory effective November 2, 2026 version of this section.

The requirements of this section apply to all One-Time Close Construction to Permanent Mortgages and Renovation Mortgages unless otherwise specified.

This section contains requirements related to:

Overview of One-Time Close transactions

One-Time Close with automatic conversion documentation structure

One-Time Close with a modification agreement documentation structure

(a)

Overview of One-Time Close transactions

In a One-Time Close transaction, the Note and the Security Instrument documenting the Permanent Financing are executed at the time of closing for the Interim Construction Financing. The terms of the Interim Construction Financing are incorporated into the Note for the Permanent Financing. A One-Time Close transaction must be converted to Permanent Financing either through automatic conversion or a modification.

For a One-Time Close transaction, the construction phase of the Construction to Permanent Mortgage must be structured as a temporary loan exempt from the ability-to-repay requirements under Regulation Z.

(b)

One-Time Close with automatic conversion documentation structure

In a One-Time Close with automatic conversion, Interim Construction Financing automatically converts to Permanent Financing upon completion of construction or renovations with no change to the terms of the Note.

For a One-Time Close with automatic conversion, the Mortgage file must include all of the following:

Uniform Security Instrument

Uniform Note applicable to the Permanent Financing Mortgage Product

Addendum to the Uniform Note with the terms of the Interim Construction Financing

(c)

One-Time Close with a modification agreement documentation structure

(i)

Documentation requirements

In a One-Time Close with a modification agreement, a Construction to Permanent Modification Agreement is used to convert the Interim Construction Financing to Permanent Financing.

The Seller must use the applicable Construction to Permanent Modification Agreement in the table below or a substantially similar modification agreement.

Mortgage Product for Permanent Financing prior to modification at closing of Interim Construction Financing

Mortgage Product for modified Permanent Financing

Freddie Mac Construction to Permanent Modification Agreement

Form 5167

In a One-Time Close with a modification agreement, the Mortgage file must include all of the following:

Uniform Security Instrument

Uniform Note applicable to the Mortgage Product for the Permanent Financing executed at the closing of the Interim Construction Financing prior to the modification

Addendum to the Uniform Note with the terms of the Interim Construction Financing

Construction to Permanent Modification Agreement applicable to the Mortgage Product for the Permanent Financing

(ii)

Terms of Permanent Financing that may be modified

The Seller may only modify the following terms of the Permanent Financing:

Interest rate

Loan balance, provided that increases in the loan balance are permitted only to cover documented increases in the cost of construction or renovation

Term

Change in amortization type from ARM to fixed-rate Mortgage

Multiple terms described above may be modified simultaneously with a Construction to Permanent Modification Agreement. However, such terms may only be modified once. Construction to Permanent Mortgages and Renovation Mortgages with multiple modification agreements are not eligible for sale to Freddie Mac.

Changes to the terms above will require resubmission to Loan Product Advisor

unless the requirements in

Section 4602.2(e)(iii)

below do not require the Seller to resubmit the Mortgage to Loan Product Advisor.

(d)

(i)

Determining Mortgage purpose

The Mortgage may be a purchase transaction Mortgage or a refinance Mortgage as follows:

The Mortgage is a

purchase transaction Mortgage

if, prior to the closing of the Interim Construction Financing, the Borrower is not the owner of record of the land or Mortgaged Premises, or is not the lessee of the leasehold estate, as applicable

The Mortgage is a

refinance Mortgage

if, prior to the closing of the Interim Construction Financing, the Borrower is the owner of record of the land or Mortgaged Premises, or is the lessee of the leasehold estate, as applicable

(ii)

(A)

“No cash-out” refinance Mortgages

“No cash-out” refinance Mortgages must meet the requirements in

Section 4301.4

, except as stated below.

Section 4301.4

, the amount of the Interim Construction Financing secured by the Mortgaged Premises is considered an amount used to pay off the first Mortgage as described in

Section 4301.4

. The proceeds of the Permanent Financing may be used to pay off a junior lien(s) secured by the Mortgaged Premises provided the lien(s) were used in their entirety for the construction or renovation of the subject property, as applicable, as documented in the Mortgage file.

Paying off unsecured lien(s) or construction costs paid by the Borrower outside of the secured Interim Construction Financing is considered cash out to the Borrower, if above $2,000 or 1% of the loan amount, whichever is greater.

(B)

Cash-out refinance Mortgages

Cash-out refinance Mortgages must meet the requirements in

Section 4301.5

. Cash-out refinance Mortgages that are Construction to Permanent Mortgages or Renovation Mortgages must not be secured by Manufactured Homes.

At least one Borrower must have been on the title to the land for six months or more prior to the Effective Date of Permanent Financing, or at least one Borrower must have inherited or was legally awarded the land in accordance with a final judgment or decision from a legal body (e.g., court, jury, judge or arbitrator) such as in a case of divorce, separation or dissolution of a domestic partnership.

(e)

(i)

General underwriting requirements

The Seller must underwrite the Mortgage based on the terms of Permanent Financing.

If terms of the Permanent Financing are modified or if the appraisal update indicates the property value has declined, then:

For a Loan Product Advisor Mortgage, it may require resubmission of the Mortgage to Loan Product Advisor as described in

, or

For a Non-Loan Product Advisor Mortgage, the Mortgage must be re-underwritten

(ii)

Age of documentation requirements

The age of documentation requirements in

Section 5102.4

must be met.

Exceptions:

For

One-Time Close Construction to Permanent Mortgages

, income, employment and credit report documentation may be dated more than 120 days before the Effective Date of Permanent Financing, but dated no more than 540 calendar days before the Effective Date of Permanent Financing, when all of the following requirements are met:

The Mortgage must be an Accept Mortgage

The documentation must be dated no more than 120 calendar days before the Note Date of the Interim Construction Financing

The credit report must be dated no more than 120 calendar days before the date of the first submission to Loan Product Advisor

The loan-to-value (LTV), total LTV (TLTV) and Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratios must not exceed 95%

For employed Borrowers, the Seller must verify employment with a 10-day pre closing verification in accordance with the requirements in

Section 5302.2(d)

, except that references to Note Date in

Section 5302.2(d)

shall mean the Note Date of Interim Construction Financing and not the Effective Date of Permanent Financing

For self-employed Borrowers, the Seller must verify current existence of the business in accordance with

Section 5304.1(m)

within 120 days prior to the Note Date of Interim Construction Financing, except that references to Note Date in

Section 5304.1(m)

shall mean the Note Date of the Interim Construction Financing and not the Effective Date of Permanent Financing

For

One-Time Close Construction to Permanent Mortgages

, asset documentation must be dated no more than 120 calendar days before the Note Date of Interim Construction Financing. Updated asset documentation is not required unless either of the following apply:

Additional funds are required to be paid by the Borrower at conversion to Permanent Financing. The additional funds meeting the requirements in

Chapter 5501

must be verified and the verification documentation must be dated no more than 120 calendar days before the Effective Date of Permanent Financing, or

Additional reserves are required due to re-underwriting of the Mortgage prior to conversion to Permanent Financing. The full amount of required reserves meeting the requirements in

Chapter 5501

must be verified and verification documentation must be dated no more than 120 calendar days before the Effective Date of Permanent Financing

(iii)

Resubmission of Loan Product Advisor Mortgages not required

Loan Product Advisor Mortgages must meet the requirements in

Chapter 5101

except that resubmission of a Mortgage to Loan Product Advisor is not required if there is:

A change from the previous submission if the change involves one of the exceptions in

Section 5101.3

A decrease in the loan amount, provided the Permanent Financing complies with all of the following requirements:

When there is an increase in the Down Payment, all funds used to reduce the loan amount must meet the requirements of

Chapter 5501

The decrease in the loan amount does not change the level of mortgage insurance coverage. For example, if the property value is $120,000 and the loan amount is $114,000 (95% LTV ratio), the loan amount may decrease to $109,200 (91% LTV ratio). However, if the loan amount decreases to $108,000 (90% LTV ratio), the loan must be resubmitted.

A change from an ARM to a fixed-rate Mortgage, provided the Permanent Financing complies with all of the following requirements:

The Permanent Financing is not subject to a temporary subsidy buydown plan

In the prior submission, the Borrower was qualified with an ARM monthly housing expense payment equal to or greater than the fixed-rate monthly housing expense

The Mortgage term of the fixed-rate Mortgage is the same as the Mortgage term for the ARM

A decrease in the reserves amount, provided that the amount of verified reserves is no less than the reserves required to be verified on the Feedback Certificate

(f)

Calculation of value

The value used to determine the LTV, TLTV and HTLTV ratios must be established as follows:

Value for One-Time Close purchase transaction Mortgages

1- to 4-unit site-built home

Value is the lesser of:

The purchase price of the Mortgaged Premises (the purchase price of the land

and total construction costs

), or