Construction-to-permanent loans: one loan to build your home, from the lot to the keys

What is a construction-to-permanent loan?

When you buy an existing home, the lender is lending on something that already exists. When you build, the lender is lending on a plan: drawings, a budget, a builder and a timeline. The home backing the loan won't exist for months.

A construction-to-permanent loan covers both parts. During the construction phase, the lender pays the builder in stages as work gets done. When the home is finished, the loan turns into a regular permanent mortgage that you repay over a standard term, like any other home loan.

This is different from buying a new home from a builder's inventory. If the builder owns the lot, builds the home, and you buy it when it's done, that's usually a standard purchase loan. A construction-to-permanent loan is for when you own, or are buying, the land and hiring the builder.

One-time close vs. two-time close construction loans: which is better?

This is the first big decision.

Neither one is always better. One-time close appeals to most of my clients because it removes the "what if something changes before we finish" worry. Two-time close can make sense for unusual projects, owner-financed land, or when a construction-only lender is the best fit for the build itself. I'll walk you through both with real numbers.

Read more in One-time close vs. two-time close construction loans.

How does a construction-to-permanent loan work, step by step?

1. Pre-approval and budget planning. We look at your income, credit and savings, and what total project cost makes sense. Run your own numbers in the construction budget planner.
2. Land. You either buy the lot as part of the construction loan, or you already own it. If you own it, any current lot loan is usually paid off at closing, and your equity may count toward the money you need to put in.
3. Builder approval. Most programs require the lender to approve your builder. They review licensing, insurance, experience and references. Start this early; it can take time.
4. Plans, specs, contract and budget. The lender needs the signed construction contract, plans and specifications, and a detailed line-item budget and draw schedule (when the builder gets paid).
5. Appraisal "subject to completion." The appraiser values the home as it will be when finished, based on the plans and specs, the land and similar homes nearby.
6. Closing. The loan closes before construction starts. In Georgia, your closing attorney handles the closing and title work.
7. Construction draws. As the builder finishes each stage, an inspector checks the work and the lender pays out money. During this time you usually pay interest only on the money paid out so far. Or the interest is covered by a reserve built into the loan.
8. Completion. Final inspection, certificate of occupancy, final title update and lien waivers. Then the loan converts, or modifies, into regular principal-and-interest payments.

What are construction draws and inspections?

Builders don't get the whole budget on day one. Money is paid out in draws tied to finished work, like foundation, framing, dry-in, mechanicals, drywall and finishes. Before each draw, a third-party inspector confirms the work was done.

This protects you as much as the lender. You're never paying far ahead of actual progress. And if a builder runs into trouble, the rest of the money is still in the loan, not in someone else's account.

What should a construction budget include?

Most construction headaches start with a budget that was too hopeful. A complete budget usually includes:

• Land or the payoff of your current lot loan
• The construction contract itself
• Soft costs: plans, engineering, surveys, permits, impact and tap fees, builder's risk insurance
• Site work the contract may not cover: clearing, grading, driveways, septic or sewer, well or water lines, utility runs
• Contingency: a cushion for overruns and change orders, often required by the program
• Interest during construction or an interest reserve
• Closing costs and any money for reserves

Change orders (changes to the plans after closing) generally need lender approval. If they push the cost past the contingency, you may need to bring cash. Make the big decisions before closing whenever you can.

Are there conventional, FHA and VA construction loans?

• Conventional. Fannie Mae has guidelines for single-closing construction-to-permanent loans. Fannie buys the loan after it converts to permanent financing, and the construction phase has time limits. Conventional options can work for primary homes and, depending on the program, second homes and some investment properties.
• FHA. HUD offers a one-time close construction-to-permanent option under FHA guidelines, with FHA's flexible credit standards and mortgage insurance.
• VA. VA purchase loans can be used to build a new home for eligible veterans and service members. Fewer lenders offer VA construction loans, so availability is more limited.
• Jumbo and portfolio. Larger custom builds may use jumbo or portfolio construction programs with their own rules.

Which programs are available for your build depends on your location, builder, property type and the lender's current rules. That's one of the first things I confirm.

Who is a construction-to-permanent loan good for?

• Families building a custom home on land they own or are buying
• Buyers who found the right lot in North Georgia, on the Gulf Coast or elsewhere and want to build exactly what they need
• Owners rebuilding or building a second home, where the program allows
• Buyers working with a licensed, insured builder who can meet lender approval rules

It's generally not a fit for owner-builder projects, where you act as your own general contractor, unless a specific program allows it in writing. Most programs don't.

How do you qualify for a construction loan?

1. You. A full review of income, credit, savings and debts, just like a purchase loan. Most programs qualify you using the permanent payment, not just the smaller interest-only construction payment.
2. Your current housing costs. If you'll keep paying rent or a mortgage while you build, lenders count that too.
3. The builder. License, insurance, experience, financial stability and references.
4. The project. Plans, specs, contract, budget, timeline, permits and site conditions.
5. The land. Ownership, title, survey, access, zoning, utilities and whether it can be built on.
6. The value. The as-completed appraisal must support the loan.
7. Reserves and contingency for the unexpected.

What documents do I need for a construction loan?

From you: standard income and asset documents, ID, and either the lot purchase contract or proof you own the land (deed, any lot-loan payoff, and what you paid and when).

From your builder: builder application, license, general liability and workers' compensation insurance, references, signed construction contract, plans and specifications, detailed budget and draw schedule, and construction timeline.

For the property: survey and legal description, title work, permits or permit status, and utility and access information.

How much do I need for a down payment on a construction loan?

The money you need to put in depends on the program, your credit and the total project cost. If you already own your land, its equity may count toward it. Whether the lender uses the land's current appraised value or what you paid often depends on how long you've owned it and on the program's rules. Confirm this early, because it can change how much cash you need.

Low down payment options exist in some conventional, FHA and VA construction programs, subject to eligibility.

How do rate locks work on a construction loan?

Builds take months, and rates move. With a one-time close loan, your permanent rate is generally set up front. That protects you if rates rise during construction. Some programs offer a float-down option that lets you grab a lower rate before conversion if rates have dropped, sometimes for a fee and within set time windows. With a two-time close, you'll set the permanent rate later, which can help or hurt depending on the market.

Construction-to-permanent loan pros

• Build exactly the home you want, on land you choose
• One-time close: one approval, one set of closing costs, less risk of having to requalify
• Draws and inspections protect your money during the build
• Land payoff and equity can be built into the loan
• Rate protection during construction on one-time close programs

Construction-to-permanent loan cons

• More paperwork and coordination than a standard purchase: builder approval, budgets, draws and inspections
• Delays happen. Weather, materials, labor and permits can stretch timelines, and programs set a maximum construction period. Extensions may cost extra.
• Cost overruns beyond your contingency may require cash
• Builder limits: your builder must qualify, and owner-builder projects are usually not allowed
• Appraisal risk: if the as-completed value comes in low, your loan amount or cash needed can change
• Paying for two homes if you rent or own while building

Building vs. buying new vs. renovating: which is better?

If a builder is offering incentives, like a rate buydown, on an inventory or spec home, I'm happy to compare that against building custom so you can see the real trade-off.

Common questions about construction-to-permanent loans

Related programs