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A construction permanent loan also known as a construction-to-permanent loan or a one-time close loan is a type of financing that combines a short-term construction loan with a long-term permanent mortgage into one loan. This loan product allows borrowers to finance the construction of a new home and take out a mortgage on the completed property in just one loan closing, saving time and money compared to getting separate construction and permanent financing.
How Does a Construction Permanent Loan Work?
A construction permanent loan works in two phases – the construction phase and the permanent phase
Construction Phase
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The lender provides financing to cover costs of land acquisition, materials, labor, permits, and other construction expenses.
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Funds are disbursed to the builder in installments (called draws) at certain milestones during the building process
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An inspector verifies work is completed before each draw is released.
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Borrowers usually only make interest payments during construction.
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The construction phase typically lasts 6-12 months on average.
Permanent Phase
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Once construction is finished and the home passes final inspection, the loan converts into a fixed-rate permanent mortgage.
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The borrower begins making principal and interest payments amortized over 15 or 30 years.
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This phase functions just like any other traditional mortgage.
By combining construction financing with permanent financing in one loan, borrowers save on closing costs and time compared to getting separate construction and mortgage loans.
Construction Permanent Loan Requirements
Since construction loans carry more risk for lenders, requirements for a construction permanent loan are stricter than a regular mortgage:
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Down payment – Typically 20% minimum
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Credit score – 680 or higher
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Debt-to-income ratio – Below 45% is ideal
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Appraisal – Appraiser estimates future completed value
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Plans/budget – Lender reviews and approves plans, budgets, schedules
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Licensed contractors – Borrower must use licensed professionals
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Inspections – Funds released after passing inspections
Having a strong financial profile and working with experienced builders reduces risks for lenders. FHA and VA loans have eased some requirements.
Pros and Cons of Construction Permanent Loans
| Pros | Cons |
|---|---|
| One closing/lower costs | Larger down payment |
| Draw funds as needed | Higher interest rates |
| Interest-only payments while building | More paperwork |
| Custom design | Cost overruns |
A construction permanent loan simplifies the process of building and financing a custom home. However, borrowers take on more risk and pay higher rates.
How to Get a Construction Permanent Loan
Follow these steps to get a construction permanent loan:
- Find a reputable builder and architect
- Shop lenders and apply for financing
- Finalize blueprints, budgets, schedules
- Provide licenses for builders, permits
- Make interest-only payments as home is built
- Loan converts to permanent mortgage upon completion
Working closely with builders and lenders ensures the project stays on track. Frequent communication is key throughout the construction process.
Alternatives to Construction Permanent Loans
If a construction permanent loan doesn’t work for your situation, alternatives include:
- FHA 203(k) loans – Finance purchase and renovation of existing home
- VA loans – 100% financing for eligible veterans
- Home equity loan – Use home equity to fund construction
- Cash-out refinance – Tap equity in current home
- Personal loan – For smaller renovations under $35k
Each option has pros and cons to weigh based on your goals, finances, and circumstances.
FAQs
What’s the difference between a construction loan and construction permanent loan?
A construction loan only covers building costs then must be paid off, while a construction permanent loan converts to a mortgage to also finance the completed home long-term.
How are funds disbursed during construction?
Funds are released to the builder incrementally as certain stages of construction are completed and inspected, not all upfront in one lump sum.
Can a construction permanent loan be used to renovate a home?
No, construction permanent loans are only for building new construction homes. Use a renovation loan for additions or renovations to an existing property.
What happens if construction goes beyond the estimated timeline?
Communicate promptly with lenders on delays to avoid complications. Major delays could impact interest rates or further financing.
The Bottom Line
A construction permanent loan simplifies financing a custom built home, offering one loan to cover both construction and the permanent mortgage. While requirements are stricter, this loan product provides an all-in-one option for borrowers to build and finance their dream home. Understanding the process, weighing alternatives, and working closely with lenders and builders can lead to a smooth construction permanent loan experience.
What is a construction-to-permanent loan?
A construction-to-permanent loan — also known as a one-time, single-close or construction-perm loan — is a type of mortgage for those building a home. It funds the purchase of land and the home’s construction. Once the home is built, the loan converts into a traditional mortgage, usually with a 15- or 30-year term.
Conventional construction-to-permanent loans can have fewer restrictions than government-backed loans.
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