Construction-to-Permanent Loan: From Groundbreaking to Refinance

Overview

A construction-to-permanent loan (often called a one-time-close or single-close loan) combines two steps—short-term construction financing and the long-term mortgage—into a single loan product. During construction you typically pay interest only on funds disbursed (draws). When the project is complete and final inspections and appraisal confirm the work, the loan converts to a permanent, fully amortizing mortgage without a separate refinance closing.

In my 15+ years advising homebuilders and owner-occupant borrowers, this structure is attractive because it reduces the logistical friction and fee duplication that come with taking a standalone construction loan and then arranging permanent financing later. But it also requires careful planning: underwriting occurs up front for both phases, so income, credit, and the project budget must be well-documented from day one.

How it works — phases, draws and conversion

1) Underwriting and close (single close)

• Lender underwrites both the construction risk and the future permanent mortgage at application. Expect documentation similar to a standard mortgage (pay stubs, tax returns, credit report) plus construction documents (plans, permit, contractor contract, budget).
• Title work and a single set of closing costs take place at loan closing.

2) Construction period and draws

• Lender sets a draw schedule tied to milestones (foundation, framing, roofing, final). You receive only the funds needed for each stage.
• Interest-only payments are common during construction; interest accrues only on amounts disbursed.
• Lenders usually require builder insurance, performance bonds in some cases, and inspections before each draw.

3) Conversion to permanent financing

• After final inspections, mortgage insurance removal conditions, or a final appraisal, the loan converts to a permanent mortgage with a set amortization (commonly 15 or 30 years).
• No second closing is required in a true one-time-close product, which saves closing costs and avoids underwriting twice.

Types of construction-to-permanent loans

• Conventional one-time-close: Conforms to Fannie Mae or Freddie Mac underwriting and may require higher credit scores (often 620–680+ depending on lender) and standard down payment guidelines.
• FHA One-Time Close (OTC): Backed by the Federal Housing Administration, this product lets borrowers use FHA underwriting to finance construction and permanent mortgage in one package; it typically allows lower down payments but has mortgage insurance requirements (see HUD/FHA guidance).
• VA construction-to-perm: Available for eligible veterans through some lenders; underwriting follows VA rules and may allow favorable terms for qualified borrowers.

Authoritative resources: See Consumer Financial Protection Bureau on construction loans for general protections and HUD/FHA guidance on FHA one-time-close options (ConsumerFinance.gov; HUD.gov).

Costs, rates and cash requirements

• Interest rate structure: You may see a single locked rate that applies during both phases or a construction-phase variable rate that converts to a locked permanent rate once a conversion occurs. Ask your lender which type you’re getting.
• Down payment: Conventional one-time-close loans often require 10–20% down for construction-to-permanent, while FHA options can require lower down payments but add mortgage insurance costs.
• Fees: Because there’s a single closing, you typically pay one set of closing costs rather than separate sets for construction and permanent financing. However, construction draws carry inspection fees and possibly construction monitoring fees.
• Carrying costs: During construction you’ll pay interest-only (lower monthly cost) but you must budget for property taxes, homeowner insurance, and occasional unexpected overages.

Eligibility and underwriting

Lenders underwrite both the borrower and the project. Typical factors reviewed:

• Credit score and credit history (conventional lenders often prefer 620–680+; FHA/VA rules differ).
• Debt-to-income ratio (DTI) — lenders model future permanent monthly payments along with interim interest payments.
• Builder qualifications and contracts — many lenders require a licensed general contractor with verifiable work history, references and insurance.
• Detailed budget, plans, and permits — lenders verify realistic costs and contingency reserves (often 5–10%).

Pros and cons

Pros

• Single closing lowers total closing costs and paperwork.
• Eliminates the need to requalify later in many cases.
• Simpler transition from draw interest to permanent amortization.

Cons

• Up-front underwriting is more stringent because the lender assumes both risks at once.
• You may pay a higher rate during the construction period than a separate construction loan would offer in some markets.
• Builder selection and draw inspection requirements can add friction.

Practical tips from experience

• Get a fixed schedule and written draw plan in your loan documents. In my practice, I’ve seen disputes arise from vague milestones; a clear draw table reduces surprises.
• Keep a 5–10% contingency reserve in your budget for unanticipated costs. Lenders won’t always fund overages mid-build.
• Ask about the rate lock: is your permanent rate locked at closing or when the loan converts? Understand how rate changes are handled.
• Vet your builder: lenders commonly require licensed contractors and may require lien waivers at each draw to protect you from unpaid subcontractors.
• Compare one-time-close offers to a two-step approach. In some markets, shopping separately for a short-term construction loan and a later refinance can still save money, but usually at the cost of more paperwork and two closings.

When to consider refinancing after conversion

Although construction-to-permanent loans are meant to become your long-term mortgage, there are valid reasons to refinance later:

• Market rates fall substantially after conversion and you want a lower monthly payment or to switch loan types.
• You need cash-out for renovations, unexpected expenses, or debt consolidation — a cash-out refinance may make sense but lenders will look at your home’s appraised value after completion.
• You want to remove mortgage insurance or shorten the term. A rate-and-term refinance can help with those goals.

For guidance on timing a refinance and evaluating offers, see our guide on when to refinance (internal resource: When to Refinance: A Homeowner’s Guide to Lowering Payments).

Common mistakes and how to avoid them

• Underestimating carrying costs: Even with interest-only construction payments, taxes, insurance, HOA fees, and utilities add up.
• Weak contract language with your builder: Have clear change-order policies and payment terms.
• Not checking builder credentials: Unlicensed or underinsured builders increase risk and may void draw approvals.
• Assuming loan conversion is automatic: Conversion often requires final inspections and a satisfactory appraisal; make sure the lender’s checklist is met.

Real-world example (anonymized)

I worked with a family building a 2,800 sq ft custom home who used a one-time-close loan. We structured a detailed draw schedule, kept a 7% contingency fund, and locked the permanent interest rate at closing. Construction took 10 months; inspections and final appraisal went smoothly and the loan converted without a second closing. The family avoided a second set of closing costs and reduced stress during the handoff from construction to occupancy.

Internal resources and further reading

• For lenders’ draw schedules and monitoring practices, read our primer: Construction Loans 101: Draws, Inspections and Interest Handling (FinHelp glossary).
• If you expect to refinance after completion, our timing guide is helpful: When to Refinance: A Homeowner’s Guide to Lowering Payments (FinHelp glossary).

Authoritative sources

• Consumer Financial Protection Bureau, “What is a construction loan?” (consumerfinance.gov) — for consumer protections and common construction-loan features.
• U.S. Department of Housing and Urban Development (HUD)/FHA, on one-time-close construction mortgages — for FHA-specific programs and mortgage insurance rules.

Disclaimer

This article is educational and not personalized financial advice. Lending rules, interest rates, and program availability change over time and by state. Consult a licensed mortgage professional, your lender, or a financial advisor before making borrowing decisions.

Frequently asked questions (brief)

• Can I buy land with a construction-to-permanent loan?
  Yes. Many lenders will include land purchase in the one-time-close package if the land is to be the construction site and underwriting supports the combined loan.

• What if construction takes longer than planned?
  Every lender’s policy differs: some allow extensions or draw-period adjustments (sometimes for a fee) while others have strict timelines. Confirm extension policies before closing.

• Is a construction-to-permanent loan the same as a construction loan?
  No. A standalone construction loan funds the build only and typically requires a separate permanent mortgage later; a construction-to-permanent loan wraps both into one product and one closing.

If you’d like, I can walk through a sample draw schedule template or a checklist to compare one-time-close offers versus separate construction and permanent loans.