Understanding Construction-to-Permanent Mortgages:
HELPING HOME OWNERSHIP BECOME REALITY
A Guide for Home builders and Buyers
If you’re planning to build your dream home, a construction-to-permanent mortgage can be an excellent financing solution. This loan simplifies the process by combining financing for land, construction, and the permanent mortgage into a single product,
eliminating the need for multiple loans. Here’s a comprehensive guide to help you understand how construction-to-permanent mortgages work, the stages involved, and what you can expect during the process.
What Is a Construction-to-Permanent Mortgage?
A construction-to-permanent mortgage, also known as a “single-close” loan, is designed to finance the purchase of land, the construction of a home, and then automatically convert into a permanent mortgage once the home is complete. This all-in-one financing solution streamlines the process and can save you time, money, and hassle.
How Does It Work?
The loan is divided into three key stages: the land purchase phase, the construction phase, and the conversion to a permanent loan phase.
1. The Land Purchase Phase
If you haven’t already purchased the land for your future home, a construction-to-permanent loan can include funds to buy it.
How It Works:
During this phase, the loan provides the funds necessary to purchase the land where the home will be built.
If you already own the land outright, its value can often be used as equity toward your loan.
If there is an existing loan on the land, the construction-to-permanent mortgage can pay it off, consolidating all costs into one loan.
How It Works:
You don’t need to secure separate financing for the land purchase,
saving you from additional closing costs and potential complications.
The lender will assess the value of the land along with the construction plans to determine the total loan amount.
2. The Construction Phase
After the land is secured, the next phase focuses on financing the actual building process.
How the Draw Process Works:
The lender releases funds incrementally—known as draws—to cover construction expenses as work progresses.
Builders submit draw requests to the lender, along with documentation of completed work.
The lender may send an inspector or appraiser to verify progress before releasing funds.
Interest-Only Payments During Construction:
During this phase, you are required to make interest-only payments on the amount that has been drawn (or disbursed). For example, if $75,000 of your loan has been drawn to cover initial construction costs, your interest payments will be based on that amount—not the full loan balance.
3. The Conversion to a Permanent Loan Phase
Once construction is complete, the loan transitions into a traditional mortgage, often called “modification” or “conversion.”
How It Works:
Your loan balance, which now includes the cost of land and
construction, becomes a permanent mortgage with standard monthly
payments.
These payments will include principal and interest, as well as
property taxes and homeowners insurance, depending on your escrow setup.
Benefits:
You don’t have to re-qualify for a new loan once construction is complete.
The transition is seamless, and you move directly into long-term home ownership financing.
Benefits of Construction-to-Permanent Mortgages
1. All-In-One Financing: Covers the land purchase, construction, and long-term mortgage in a single loan.
2. Single Closing: You only go through the closing process once, saving on costs and paperwork.
3. Locked-in Rates: The interest rate is locked upfront, reducing concerns about rate increases.
4. Flexible Draw Schedule: Funds are released as needed, ensuring the builder has access to capital without overburdening you with upfront costs.
5. Simplified Transition: The loan automatically converts to a permanent mortgage, saving you the hassle of applying for another loan after construction.
What You Need to Know Before Applying
Down Payment Requirements: Construction-to-permanent loans require a
down payment of 10% of the combined price for the land and
construction.
Builder approval: We will confirm the builder has required licenses
in good standing and that they have no current judgements against them.
“We believe that a well planned mortgage leads to long term wealth.”
- From a Very Wise Man
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