What Is a Construction to Permanent Loan?

A construction-to-permanent (C2P) loan offers a streamlined approach to financing a new home or substantial renovation. This financial product combines funding for the building phase with a long-term mortgage into a single loan, requiring only one closing. This simplifies the complex process of financing new construction, providing a continuous financial solution from breaking ground to moving into the completed residence.

Understanding the Single Closing Loan Structure

A construction-to-permanent loan is characterized by its single closing, meaning borrowers complete all loan paperwork and pay associated closing costs just once for both the construction and permanent financing phases. This unified structure integrates what would typically be two separate financial products—a short-term construction loan and a long-term mortgage—into one comprehensive package. The loan transitions automatically from the construction phase into permanent financing upon project completion, without a second application or additional closing.

The Construction Phase of the Loan

During the construction phase, the lender disburses funds through a “draw schedule,” releasing money in stages as specific construction milestones are achieved. Before each disbursement, a lender or third-party inspector conducts an inspection to verify work progress and quality standards. Borrowers generally make interest-only payments during this period, calculated solely on the funds drawn to date. This arrangement can ease the financial burden during construction, especially if borrowers are also managing existing housing costs. The construction phase typically lasts between 6 to 12 months.

The Permanent Financing Phase

Once construction is fully completed and the property receives a certificate of occupancy, the construction-to-permanent loan automatically transitions into its permanent financing phase. At this point, the loan converts from interest-only payments to a traditional principal and interest repayment schedule. The final outstanding balance is re-amortized over the remainder of the loan term, which commonly spans 15 or 30 years. The interest rate, often locked in at the initial closing, applies to this long-term repayment period, providing predictability for future monthly payments.

Key Borrower Preparations

Before applying for a construction-to-permanent loan, borrowers must ensure their financial profile meets lender requirements, which typically include a credit score of 670 or higher and a debt-to-income ratio below 45%. Lenders often require a significant down payment, commonly around 20% of the total project cost. Borrowers must also gather comprehensive project documentation, including approved construction plans, blueprints, material specifications, and a precise budget breakdown from the builder. Selecting a qualified, licensed, and insured builder is essential, as lenders frequently have specific approval processes for contractors. The lender will use these plans and the borrower’s financial standing to assess the project’s estimated value upon completion and determine loan eligibility.