Construction To Permanent Loan

Oct 18, 2023 By Susan Kelly

A loan known as construction to permanent finance is a form of credit that allows borrowers to construct or modify their own homes. This loan will automatically convert into a standard mortgage after the project's construction phase is complete, and you will not be required to go through another closing. You will only pay for a single transaction's closing expenses.

There are various reasons why you could be a good candidate for a loan that transitions from construction to permanent finance. You can borrow up to 2 million dollars with this financing. When you apply for a mortgage, the rates that apply to both the construction and permanent loans are locked in, so you won't have to worry about those rates climbing while you build.

This particular loan may be used toward the purchase of a property, the construction of a building on that lot, or home improvements. It can pay the price of labor and materials for either your main or vacation home. To qualify for a construction to permanent loan, the property must also be a single-family, single-unit dwelling.

After the closing, you will use any leftover funds from your down payment savings to pay your builder so that they can get started on the construction of your home. When your remaining reserves for the down payment have been depleted, you will be able to take money out of your construction to a permanent loan so that you may pay for the construction charges. Following the completion of the construction project, the loan will transition into a permanent loan, such as a conventional loan with a period of thirty years.

How a Construction to Permanent Loan Works

The way that construction to permanent loans operate is by giving you the cash you need to develop the house and the mortgage in one convenient loan package. When you take out construction to permanent loan, you are normally only obliged to make interest payments during the period in which the construction is being constructed. The interest payment amount is determined by how much of the loan profits have been disbursed to your builder so that they may finish the construction of the house.

During construction, you will be required to make payments to the builder in exchange for the work that has been completed. Before releasing any money obtained via the construction loan proceeds, your lender will likely need documentation that the job has been completed. An examination of the work may be carried out in person as part of this process.

When the building's construction is finished, you'll start paying the principal. This will only occur when your loan's construction phase has been completed, and the permanent phase has begun. You will need to ensure that the house is adequately insured, just as you would for any other mortgage loan. Depending on the location of the construction project, this might need acquiring flood insurance in addition to your standard homeowner's insurance.


A loan that transitions from construction to permanent status comes with several benefits. To begin, this form of loan functions very similarly to a line of credit in that you are authorized to withdraw precisely the amount of money required at the precise moment that it is required of you.

Another advantage is that you will only be required to pay interest on the portion of the loan withdrawn during the construction period. Up to 18 months from your house's construction, you will be responsible for paying just the interest payments on the construction portion of the loan. Therefore, throughout this period, your payments will be less than they would have been if you had obtained a different kind of loan. This degree of adaptability is quite helpful, particularly when the construction process takes far longer than anticipated.


Even though this kind of loan is convenient, it has some downsides. It is common practice for lenders of construction to permanent loans to demand much higher fixed interest rates, particularly during the construction period. It could take up to 18 months before you can switch from making interest-only payments on your mortgage to making payments that include both the principal and the interest.

Your lender may charge a fixed interest rate that is the same for all stages of the loan or lower the fixed interest rate once the loan is converted to a permanent mortgage loan. To qualify for this loan, you may be required to submit a greater initial deposit, often at least 20% of the total loan amount. Several financing options can demand a smaller initial deposit.

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