Overview

Construction-to-permanent loans (sometimes called one-time-close loans) let you borrow for building and then automatically convert that same loan into a permanent mortgage when construction finishes. The key operational detail for borrowers is how lenders handle disbursements (draws), inspections, retainage, and interest accrual while work is ongoing.

How draws and interest are synchronized

  • Interest on drawn amounts only: During construction you normally pay interest only on funds actually disbursed. If your loan is $500,000 but only $200,000 has been released for the foundation, interest accrues on the $200,000 (not the full $500,000).
  • Draw schedule tied to inspections: Lenders release draws after on-site inspections or approved invoices. Typical stages: land, foundation, framing, mechanicals, drywall/finish, and final inspection. Expect 5–10% retainage in some contracts until final completion.
  • Timing matters: Draws are often weekly or monthly depending on project pace. Late inspections or incomplete paperwork delay draws—and interest keeps accruing on amounts already released.
  • Rate and conversion terms: Some loans lock the permanent rate at closing (one-time close); others let you lock later. If the permanent rate isn’t locked, market moves can change your long-term payment at conversion.

Quick sample calculation

  • Scenario: Draws total $200,000 at 7.0% annual interest. Monthly interest = 0.07/12 × $200,000 = $1,166.67. If a second draw of $150,000 occurs later, monthly interest on total drawn becomes 0.07/12 × $350,000 = $2,041.67.
  • Practically: you pay interest only on what’s been disbursed at each point. That’s why aligning draw timing with actual work completed avoids paying interest on funds sitting unused.

Common problems and how to avoid them

  • Inspection delays and stalled draws: Build a clear inspection schedule into your contract and submit draw requests with complete documentation (invoices, lien waivers, progress photos).
  • Misunderstanding retainage: Confirm whether your builder holds back a percentage and how that affects the final disbursement.
  • Rate exposure at conversion: Ask the lender whether the permanent rate is locked at closing or at conversion; if not locked, consider a rate lock or float-down option when construction nears completion.
  • Budget shortfalls: Keep a contingency (typically 5–15%) for overruns. If construction exceeds the approved budget, lenders generally won’t advance extra funds without underwriting approval.

Practical borrower checklist

  1. Get a written draw schedule and inspection milestones from your lender and builder.
  2. Confirm interest calculation method (daily vs. monthly) and whether payments are interest-only during construction.
  3. Request lender disclosure on conversion terms: when and how the loan converts to amortizing.
  4. Collect lien waivers, paid invoices, and photos before each draw request.
  5. Plan a contingency reserve and discuss holdback/retainage mechanics with your builder.

When to lock the permanent rate

  • If the lender offers a one-time close with a permanent rate locked at origination, you avoid market risk but may pay a small premium.
  • If the rate locks later, negotiate a lock window as construction nears completion (typical window: 30–60 days). Ask about float-down options if rates fall.

Documentation and protections

  • Require a written draw schedule in the loan contract and include inspection criteria.
  • Use conditional disbursement (pay the builder only for verified work) and obtain lien waivers to reduce risk of contractor claims.
  • Monitor builder performance and hire an independent inspector if needed.

Internal resources

For deeper detail on timing, inspections, and draw handling, see our guides:

Authoritative sources

  • Consumer Financial Protection Bureau: guidance on construction loans (consumerfinance.gov).
  • U.S. Department of Housing and Urban Development: FHA One-Time Close and construction program resources (hud.gov).

Professional note

In my practice advising owner-builders and custom-home clients, projects that succeed are those where the borrower, builder, and lender agree up front on draw timing, inspection standards, and rate-conversion mechanics. Clear paperwork and an adequate contingency reserve reduce surprises.

Disclaimer

This article is educational only and does not constitute financial or legal advice. Terms and availability vary by lender—consult your mortgage professional or attorney for personalized guidance.