Quick Answer
Yes, you can get a one-time close construction loan with low credit. These bad credit construction loan options—especially through FHA and VA programs—offer paths to approval even if your credit score is less than ideal.
While most lenders prefer higher credit scores, options and workarounds exist for credit-challenged borrowers who meet other qualifying criteria.
What is a one-time close construction loan?
A one-time close construction loan is a mortgage that combines your home construction financing and long-term mortgage into a single loan with a single closing. It’s also known as a construction-to-permanent loan or single-close construction loan.
Instead of going through two separate approval processes—one for building, another for permanent financing—you apply once and close once. After construction is complete, the loan automatically converts into a permanent mortgage.
See if you qualify for a single-close loan with GO Mortgage’s streamlined application.
Can you qualify for a bad credit construction loan?
It is possible to get a one-time close construction loan with bad credit, but it depends on several factors:
- Loan type: Government-backed loans (FHA and VA) offer more lenient credit guidelines.
- Lender flexibility: Some lenders allow manual underwriting or compensating factors.
- Other qualifications: A strong income, low debt, or a large down payment can help offset poor credit.
There’s no universal definition of “bad credit,” but many lenders consider scores below 620 to be subprime. FHA loans may allow scores as low as 500, and VA loans often have no minimum credit requirement, although most lenders set their own thresholds.
A one-close loan with low credit can be a smart option for borrowers who meet income and down payment requirements but have a less-than-perfect credit history.
FHA one-time close construction loan with bad credit
An FHA one-time close loan is a popular option for borrowers with credit challenges. This program is backed by the Federal Housing Administration and allows lower credit scores and smaller down payments.
FHA loan requirements:
- Credit score: As low as 580 with 3.5% down, or 500–579 with 10% down
- Debt-to-income ratio (DTI): Typically 43% or lower
- Property type: Must be a primary residence
- Builder approval: You must use an FHA-approved licensed builder
This program is designed for buyers with limited credit histories, past credit issues, or lower income levels.
VA one-time close loan for borrowers with bad credit
If you’re a veteran, active-duty service member, or eligible spouse, a VA one-time close construction loan may offer even more flexibility.
VA loan benefits for credit-challenged borrowers:
- No official minimum credit score (many lenders accept scores as low as 580)
- No down payment required
- No private mortgage insurance (PMI)
- Flexible underwriting standards
Like FHA loans, VA one-time close loans are for primary residences only and require you to work with VA-approved builders.
What are compensating factors?
If your credit score is below the lender’s preferred range, you may still qualify by demonstrating compensating factors, which are strengths in other areas of your financial profile.
Common compensating factors include:
- Large down payment (10% or more)
- Significant cash reserves or savings
- Strong income and steady employment history
- Low debt-to-income (DTI) ratio
- Minimal other debts or liabilities
Lenders may also consider non-traditional credit, such as rent or utility payment history, during manual underwriting. These compensating factors are often essential when applying for a bad credit construction loan, helping offset the risk for lenders.
Workarounds and alternatives if you don’t qualify
If you’re unable to qualify for a one-time close loan right now, here are options that can improve your chances or offer alternative paths:
1. Improve your credit score
- Pay down existing debt
- Dispute errors on your credit report
- Make on-time payments for several months
Even a small increase, like going from 580 to 620, can open the door to better loan terms.
2. Apply with a co-borrower
A family member or spouse with stronger credit can help you qualify by sharing responsibility for the loan.
3. Make a larger down payment
If you can put down 10% or more, lenders may be more willing to overlook a lower credit score.
4. Use a builder financing program
Some builders partner with lenders to offer flexible financing solutions that accommodate lower credit scores.
5. Consider a two-time close loan
A two-time close loan gives you time to improve your credit during the construction phase before applying for a permanent mortgage.
Risks of getting a construction loan with bad credit
While possible, taking out a one-time close construction loan with poor credit comes with risks:
- Higher interest rates: Lenders may charge more to offset the risk
- Stricter oversight: You’ll need to work with an approved builder and follow the lender’s draw schedule closely
- Fewer lender options: Many banks avoid lending to subprime borrowers for construction loans
- Limited fallback: If you miss payments during construction, there’s no second loan phase to restructure
This is why it’s essential to select a lender that understands low-credit scenarios and offers government-backed programs.
FAQ: One-time close construction loan with bad credit
Q: What’s the minimum credit score for a one-time close construction loan?
A: It depends on the loan type. FHA loans allow scores as low as 500, whereas most lenders prefer scores between 580 and 620. VA loans have no official minimum.
Q: Can I get a construction loan if I’ve filed for bankruptcy or had a foreclosure?
A: Possibly. FHA and VA guidelines permit borrowers with past bankruptcies or foreclosures, provided enough time has passed, typically 2–3 years.
Q: Are interest rates higher for bad credit borrowers?
A: Yes. Borrowers with low credit scores typically receive higher interest rates to compensate for the risk. A better score may significantly reduce your rate.
Q: Do I need to requalify after construction if I use a one-time close loan?
A: No. One-time close loans only require a single qualification process at the outset. This protects you from needing to requalify post-construction.
Q: Can I use gift funds for the down payment?
A: Yes. FHA and VA programs both allow gift funds from family members or approved sources to be used for your down payment or closing costs.
Options exist, even with bad credit
If you have bad credit, you’re not automatically disqualified from building your dream home. One-time close construction loans, backed by the FHA or VA, can offer a path forward, even for those with scores below 620.
While the process may require more documentation or higher costs, the right lender can help you find a solution.
Begin by reviewing your credit profile and exploring government-backed programs. GO Mortgage can help you find flexible financing options tailored to your situation. Get started today.