Construction to Permanent Loan: The Complete Guide for Homebuilders

Construction to Permanent Loan: The Complete Guide for Homebuilders

If you're planning to build your dream home from the ground up, you've likely heard the term construction to permanent loan. This financing option is an increasingly popular choice for homeowners who want to streamline the lending process and secure long-term financing in one package. In this guide, we'll break down everything you need to know about construction to permanent loans, how they work, their pros and cons, eligibility requirements, and how to apply.

What Is a Construction to Permanent Loan?

A construction to permanent loan, also known as a single-close loan, is a type of mortgage that finances both the construction of a new home and the permanent mortgage once the home is completed.

Unlike traditional construction loans that require two separate closings (one for construction and another for the mortgage), a construction to permanent loan simplifies the process by combining them into a single closing. This saves time, reduces closing costs, and provides peace of mind with locked-in rates.

How It Works

1. Application and Approval – You apply for the construction-to-permanent loan just like any other mortgage. Once approved, you close on the loan before construction begins.
2. Construction Phase (Draw Period) – During construction, the lender disburses funds in stages (draws) to the builder as specific milestones are completed. You typically make interest-only payments during this phase based on the disbursed amount.
3. Permanent Mortgage Phase – After construction is completed and passes inspection, the loan automatically converts into a traditional fixed-rate or adjustable-rate mortgage (ARM). You begin making full principal and interest payments based on the full loan amount.

Benefits of a Construction to Permanent Loan

• One-Time Closing
  Only one loan application and one closing process are required, saving time and money compared to dual-loan alternatives.
• Interest Rate Protection
  You can lock in your interest rate at the time of closing, protecting you from rate increases during the construction phase.
• Simplified Process
  Fewer steps and paperwork make the process smoother for both you and your builder.
• Reduced Closing Costs
  You only pay closing costs once, which can amount to thousands of dollars in savings.
• Seamless Transition
  There's no need to requalify or reappraise once construction is complete—your loan transitions automatically to a permanent mortgage.

Potential Drawbacks

• Strict Approval Requirements
  Lenders often have tighter credit and income requirements for construction to permanent loans, given the added risk.
• Higher Down Payments
  Most lenders require 10%–20% down, though some programs may accept less with strong qualifications or VA/USDA backing.
• Builder Approval Required
  You must work with a licensed, insured builder that’s approved by your lender. DIY or self-built projects are typically not allowed.

Who Is a Construction to Permanent Loan For?

This type of loan is ideal for:

• Custom home builders who want control over their home’s design.
• Homeowners purchasing land and building from scratch.
• Buyers working with a contractor who has a proven track record and works with approved lenders.
• Individuals seeking a simplified financing path from construction to homeownership.

Loan Requirements

Lenders will typically evaluate your application based on:

• Credit Score: 680 or higher is preferred.
• Debt-to-Income Ratio (DTI): Generally under 45%.
• Down Payment: Usually 10%–20%.
• Builder Approval: Must use an approved contractor.
• Plans and Budget: Full construction plans and a detailed cost breakdown must be submitted for review.

Types of Construction to Permanent Loans

1. Conventional Construction to Permanent Loan

• Backed by private lenders.
• Best for borrowers with good credit and stable income.
• Offers both fixed and adjustable-rate options.

2. FHA Construction to Permanent Loan

• Backed by the Federal Housing Administration.
• Allows lower down payments (as low as 3.5%).
• Ideal for first-time buyers or those with lower credit scores.

3. VA Construction to Permanent Loan

• For eligible veterans and active-duty service members.
• Offers zero down payment.
• Must use a VA-approved builder and lender.

4. USDA Construction to Permanent Loan

• For rural homebuyers.
• Zero down payment required.
• Must meet income and geographic eligibility requirements.

Steps to Apply for a Construction to Permanent Loan

Step 1: Pre-Approval

Speak with a lender who offers construction to permanent loans. Get pre-approved to determine your budget and eligibility.

Step 2: Hire an Approved Builder

Choose a licensed builder who meets your lender’s requirements and can provide detailed plans and cost estimates.

Step 3: Submit Plans & Specs

Your lender will review the construction blueprints, specs, timelines, and cost estimates to ensure the project is viable.

Step 4: Close on the Loan

Once approved, you'll close on the loan and begin the construction phase. This is when you lock your rate and pay closing costs.

Step 5: Construction Phase Begins

Funds are disbursed in stages to the builder. You make interest-only payments based on the amount disbursed.

Step 6: Loan Converts to Mortgage

Once construction is complete, the loan transitions into a permanent mortgage, and you begin regular payments.

Frequently Asked Questions Construction to Permanent Loan

Final Thoughts

A construction to permanent loan is a smart, streamlined way to finance building your dream home from start to finish. With a single application, one set of closing costs, and the ability to lock in your interest rate early, it's a convenient option for those ready to invest in custom homebuilding.

Before applying, work with a lender who specializes in construction loans, and make sure your builder is experienced and approved. With the right team and planning, you can turn your dream home into a reality—without the financial stress of managing multiple loans.

Ready to get started? Talk to a qualified mortgage lender today and ask about their construction to permanent loan options to make your homebuilding journey smoother and smarter.