Construction-to-Permanent Loan Guide: Complete Process from Groundbreaking to Permanent Mortgage

Building your dream home from the ground up is exciting—but the financing can feel overwhelming if you don’t understand how construction-to-permanent loans actually work. Unlike traditional mortgages where you borrow once and start making payments immediately, construction-to-permanent financing structures everything differently: one closing, extended rate locks, draw-based funding, interest-only payments during the build, and automatic conversion to a traditional mortgage when construction is complete.

If you’re considering new construction, understanding this loan type is essential before signing builder contracts or breaking ground. Here’s everything you need to know about construction-to-permanent loans—from qualification through final conversion.

What Is a Construction-to-Permanent Loan?

A construction-to-permanent loan (also called a one-time close construction loan) finances both your construction phase and your permanent mortgage in a single transaction with one closing. Instead of securing a short-term construction loan and then refinancing into a permanent mortgage after completion—paying closing costs twice—you close once, lock your rate before construction begins, and automatically convert to a traditional mortgage when the home is finished.

This structure offers several advantages: you pay closing costs only once, your interest rate is locked before construction starts (protecting you from rate increases during the build), and there’s no refinance requirement or second approval process when construction finishes. You simply transition from interest-only payments on drawn funds during construction to principal-and-interest payments on the full loan amount once you receive your certificate of occupancy.

How Construction-to-Permanent Loans Work: The Three Phases

Phase 1: Pre-Construction Approval and Rate Lock

Before construction begins, you apply for the full loan amount needed to cover land (if not already owned), construction costs, and permanent financing. The lender underwrites you based on projected home value after completion—not current land value—requiring detailed construction plans, builder contracts, cost breakdowns, and appraisals based on completed home value.

Once approved, you lock your interest rate for the full construction timeline plus closing—typically 6-18 months depending on your build complexity. This extended rate lock protects you from rate increases during construction but costs more than standard 30-60 day locks. Many construction mortgage brokers recommend float-down options that let you capture lower rates if markets improve during your build.

Phase 2: Construction Phase and Draw Schedule

During construction, your lender releases funds in stages based on completed work—typically 4-7 draws covering foundation, framing, mechanicals, drywall, and final completion. Each draw requires an inspection to verify work is complete before releasing the next funding tranche. You pay interest only on the funds drawn to date, not the full loan amount.

For example, if your total construction loan is $400,000 and you’ve drawn $150,000 through the foundation and framing stages, you only pay interest on $150,000 until the next draw. This keeps your costs lower during construction when you may still be paying rent or an existing mortgage elsewhere.

Your construction mortgage broker coordinates draw timing with your builder to ensure funding releases match construction milestones without delays that could stall your project.

Phase 3: Conversion to Permanent Mortgage

When construction is complete and you receive your certificate of occupancy, the loan automatically converts from construction financing to a traditional permanent mortgage. There’s no new application, no second approval, no additional closing costs. Your interest rate remains what you locked at the beginning (unless you exercised a float-down option), and you begin making full principal-and-interest payments on the entire loan amount.

The conversion happens seamlessly—your construction-to-permanent loan simply transitions into standard mortgage payments based on your original loan terms (15-year, 30-year, fixed-rate, etc.).

Construction-to-Permanent Loan Requirements

Qualifying for construction-to-permanent financing is stricter than traditional purchase loans because lenders face more risk during the construction phase. Expect higher credit score requirements (typically 680+ minimum, though 720+ gets best rates), larger down payments (usually 10-20%, sometimes as low as 5% for strong borrowers), and more thorough builder verification.

Lenders also require detailed construction documentation: architectural plans, builder contracts with fixed pricing (not cost-plus arrangements), builder licensing and insurance verification, construction timelines, and itemized cost breakdowns for materials and labor.

Your middle credit score determines your rate pricing and approval odds—if you’re borderline, improving your score before applying can save thousands over the life of the loan. Construction mortgage brokers through BrowseLenders.com can pre-qualify you and identify any credit or documentation issues before you commit to builders or sign contracts.

Interest Rates and Costs: What to Expect

Construction-to-permanent loan rates are typically 0.25%-0.75% higher than traditional purchase loan rates due to increased lender risk during the construction phase. However, you’re locking this rate before construction begins—potentially 6-18 months before your home is complete—which provides protection if rates rise during your build.

Extended rate lock fees add cost (typically 0.125%-0.25% of loan amount per month beyond standard lock periods), and float-down options cost extra but provide downside protection if rates drop during construction.

Closing costs for construction-to-permanent loans are similar to traditional mortgages (2%-5% of loan amount), but you pay them only once instead of twice. If you were to use a construction-only loan and then refinance into a permanent mortgage, you’d pay closing costs on both transactions—often an additional $8,000-$15,000 in expenses.

Common Construction-to-Permanent Loan Challenges

Even with proper planning, construction projects face challenges that can affect your financing:

Timeline delays: Weather, permit issues, material shortages, or labor problems can push your completion date beyond your rate lock expiration. Budget for rate lock extensions (costly) or accept relocking at current market rates if delays extend too long.

Cost overruns: If construction costs exceed your approved loan amount, you’ll need to cover overages out of pocket or negotiate change orders with your builder. Lenders won’t increase loan amounts mid-construction without significant re-underwriting.

Builder issues: If your builder goes out of business, abandons the project, or delivers substandard work, your construction financing can be jeopardized. Always work with licensed, insured, bonded builders with strong track records—your construction mortgage broker should verify builder credentials before you sign contracts.

Is Construction-to-Permanent Financing Right for You?

Construction-to-permanent loans work best for borrowers building custom homes or purchasing spec homes mid-construction who want rate lock protection and the convenience of one closing. If you’re buying a completed spec home (move-in ready), traditional purchase financing is usually simpler and cheaper.

Before committing to construction-to-permanent financing, compare options through verified construction mortgage brokers at BrowseLenders.com—understanding how draw schedules work, what your builder verification requirements are, and how timeline delays could affect your financing.

Building a home is one of the biggest financial commitments you’ll make. Understanding your construction financing options before signing contracts replaces confusion with confidence—helping you protect your investment from groundbreaking through final conversion.

If you currently own a home with equity, consider using cash-out refinance proceeds for your construction down payment—your construction mortgage broker can structure timing to bridge both transactions smoothly.