How to Get a Construction to Permanent Loan

A construction to permanent loan offers a streamlined solution for building a custom home, combining funding for both the construction phase and the long-term mortgage into a single financial product. This approach simplifies the financing process, providing a continuous funding source from breaking ground to moving into your completed home.

Understanding Construction to Permanent Loans

A construction to permanent loan, also known as a one-time close or single-close loan, integrates the financing for home construction and the subsequent permanent mortgage into one loan package. This structure provides funding for acquiring land, purchasing materials, and covering labor costs during the building phase. Once construction concludes, the loan automatically transitions into a traditional mortgage, typically with a 15- to 30-year term. This eliminates the need for a separate loan application and a second closing, which can save both time and additional closing costs.

During the construction phase, borrowers typically make interest-only payments on the funds disbursed as the project progresses. The construction period usually ranges from 6 to 18 months. As construction milestones are met and funds are drawn, the outstanding balance increases, leading to proportional interest payments. This payment structure offers financial flexibility, as borrowers are not required to pay principal while their new home is being built.

This single-loan approach contrasts with a two-loan method, where a borrower obtains a short-term construction loan and then a separate, long-term mortgage. While a two-loan approach might seem flexible, it involves two distinct application processes and two sets of closing costs. The construction to permanent loan helps mitigate the risk of market changes, such as rising interest rates, because the permanent financing rate can often be locked in at the initial closing.

Gathering Your Application Materials

Successfully applying for a construction to permanent loan requires a thorough compilation of various documents and information. Lenders evaluate both your financial standing and the specifics of your proposed construction project.

Lenders will scrutinize your personal financial information to assess your ability to repay the loan. This includes reviewing your credit history, with most lenders seeking a credit score of 680 or higher for conventional loans, though some may prefer 720 or better. Your debt-to-income (DTI) ratio is also a significant factor, typically needing to be below 45% for many programs, and ideally 36% or lower. To verify income, lenders will request documents such as recent pay stubs, W-2 forms or 1099s, and tax returns for the past two years. Additionally, statements for bank accounts, investment portfolios, and other assets will be required to confirm available funds for the down payment and reserves.

Beyond personal finances, comprehensive details about the property and the construction project are essential. If you already own the land, documentation proving ownership will be necessary. Detailed construction plans and blueprints, along with a comprehensive budget that includes both soft costs (like permits, architectural fees, and appraisals) and hard costs (such as materials and labor), must be provided. A realistic construction timeline outlining start and completion dates is also required.

Information about your chosen builder is also a significant component of the application. Lenders need to vet the builder’s qualifications, experience, licensing, and insurance. This ensures the builder is reputable and capable of completing the project as planned. Finally, evidence of necessary local building permits and any required zoning or environmental approvals will be required before construction can begin.

Applying for the Loan and Managing Construction Draws

Once all necessary materials are meticulously gathered, the next phase involves submitting your application and managing the financial flow during construction. This comprehensive package, including all personal, property, and builder documentation, is provided to the chosen lender.

Following submission, the lender initiates the underwriting process to assess your financial stability and the project’s viability. This includes an appraisal of the proposed completed home, which evaluates its future value based on the plans and budget. Upon successful underwriting, the loan receives final approval. The entire application and approval process can take anywhere from 30 to 60 days, depending on various factors including appraisal timelines and the lender’s volume.

During the construction phase, funds are not disbursed as a lump sum but rather through a series of “draws” tied to specific construction milestones. These draws are typically requested by the builder as work progresses, such as after the foundation is laid or framing is complete. Before each draw is approved, the lender or a third-party inspector will conduct an inspection to verify that the work has been completed according to the plans and budget. Interest payments during this phase are calculated only on the amount of funds that have been drawn, providing a lower monthly cost initially. Effective communication between the borrower, builder, and lender is important throughout the construction period to ensure smooth disbursements and address any potential issues.

Converting to Permanent Financing

The final stage of a construction to permanent loan involves its transition into a long-term mortgage. This conversion occurs once the construction phase is officially completed. For the lender, “completion” typically means the home is ready for occupancy and often requires a certificate of occupancy from the local government authority.

Before the loan converts, the lender may require a final appraisal or inspection. This ensures the home has been built according to the approved plans and specifications and that its final value aligns with the loan amount. Any mechanic’s liens or claims related to the construction must be satisfied before the permanent mortgage takes effect.

The loan conversion process then transitions the financing from the interest-only construction phase to the principal and interest payment structure of a traditional mortgage. The final interest rate for the permanent loan, if not already locked in, will be established at this point. The loan is re-amortized over its standard term, commonly 15 or 30 years, and regular monthly payments, including both principal and interest, begin. This single-closing structure means that borrowers avoid the complexities and additional costs of applying for a separate mortgage and going through a second closing.