How the loan is structured and the typical timeline

A construction-to-permanent loan finances the build in two phases under one underwriting package: the construction phase (short-term, interest-only draws paid as work is completed) and the permanent phase (the long-term mortgage after completion). Typical timeline steps:

  • Application and approval: lender reviews plans, budget, builder contract, credit, and income.
  • Closing (one-time close): borrower signs the single loan that covers both construction and the permanent mortgage.
  • Construction draws and inspections: lender releases funds in stages for completed work after inspections.
  • Completion and conversion: final inspection and certificate of occupancy trigger conversion to the permanent mortgage.

Lenders and loan products vary; some programs are marketed as “one-time close” or “two-in-one” loans.

Key steps borrowers should expect

  1. Prepare full project documentation: detailed plans, line-item budget, builder contract and specifications, builder license and insurance, and timeline.
  2. Budget a contingency (10% or more): lenders expect reserves for overruns; private projects commonly need 10–20% contingency.
  3. Understand the draw schedule and inspections: funds are released in stages; each draw usually requires an inspection and lien waivers.
  4. Confirm interest handling during construction: most loans charge interest only on funds drawn; you’ll likely pay those interest charges before the permanent phase begins.
  5. Know conversion terms: check whether the permanent rate is locked at origination or must be locked later; find out if the permanent loan will be fixed-rate or adjustable.

Common pitfalls and how to avoid them

  • Underestimating total cost: incomplete budgets, permit fees, landscaping, utility hookups, and change orders add up. Use an itemized budget and a healthy contingency.
  • Poor choice of builder: choose a licensed, insured builder with verifiable references and on-time, on-budget performance. Require lien waivers and clear warranty terms.
  • Draw disputes and inspection delays: missing paperwork or failed inspections can stop disbursements. Keep a central file for invoices, photos, and inspection records and maintain open lines with your lender and builder.
  • Rate and timing risk: if your permanent rate isn’t locked at closing, market moves can raise long-term costs. Ask whether the loan offers a rate lock during construction.
  • Incomplete conversion terms: some lenders require a separate short closing to convert; insist on written conversion mechanics, fees, and timing before signing.

Eligibility, down payments and program differences

  • Conventional construction-to-permanent loans typically expect 10–20% down, depending on credit and lender policies.
  • FHA and VA offer one-time-close construction options with different down payment rules (FHA construction-to-perm may allow lower down payments; VA construction loans can offer favorable terms to eligible veterans). See official program pages for details: CFPB on construction loans, VA construction loans.

Documents lenders commonly require

  • Signed construction contract and builder scope of work
  • Detailed construction budget and draw schedule
  • Architect or builder plans and specifications
  • Builder’s license, insurance declarations, and lien waivers
  • Proof of down payment funds and reserves

Practical tips I use with clients

  • Get multiple bids and require a fixed-price contract where possible.
  • Require a detailed, phased draw schedule and a holdback for final finishes.
  • Order an independent inspection before each draw or hire an independent project manager for larger builds.
  • Keep a 10–20% contingency and confirm the lender’s policy for change orders.
  • Ask the lender in writing whether the permanent rate is locked at closing and what fees apply at conversion.

Related resources on FinHelp

Quick checklist before you sign

  • Confirm total project budget and contingency.
  • Verify builder licensing, insurance, and references.
  • Understand draw amounts, inspections, and lien waiver process.
  • Get written terms for conversion to the permanent mortgage and any rate-lock details.
  • Confirm closing costs and whether another closing is required at conversion.

Short disclaimer

This article is educational and not personalized financial advice. Loan programs and rules change; consult your lender or a licensed mortgage professional for guidance that matches your situation. Authoritative resources: Consumer Financial Protection Bureau and U.S. Department of Veterans Affairs.