Background

Construction-to-permanent loans—often called one-time-close loans—were developed to simplify homebuilding finance by replacing the traditional two-loan path (a construction loan followed by a separate mortgage) with a single loan that converts to permanent financing after construction is finished. This reduces repeated closing costs and the need to requalify twice.

How it works: timing, draws, and conversion

  • Loan structure: Lenders disburse funds during construction in scheduled draws tied to construction milestones. During the build phase most borrowers pay interest-only on the disbursed balance. When construction completes (usually after a final inspection and a certificate of occupancy), the loan converts to a permanent, fully amortizing mortgage.
  • Timing: Typical construction timelines vary by project. Lenders usually schedule draws at major milestones—foundation, framing, mechanicals/roofing, and final interior—every few weeks or after verified completion of work. Many lenders require inspections before each draw, so plan for inspector availability and minor punch-list items.

Draw schedules and common terms

  • Draw schedule: Lenders create a draw schedule before closing that ties disbursements to defined work items. A schedule can be as few as 3 draws or more than 8 for custom builds. Percentages per draw are negotiable and tied to the contract and lender policy.
  • Holdbacks/retainage: Lenders often retain a final percentage (for example, 5–10%) until final completion to cover punch-list items or permit liens. Some contracts also include contractor retainage.
  • Inspections: Inspections may be done by the lender, an independent third-party inspector, or an approved local building inspector. The inspector verifies work quality and that the value of completed work supports the requested draw.

Interest, rates, and rate locks

  • Interest during construction: Most lenders charge interest only on amounts advanced during construction. The rate during construction can be variable (tied to an index) or fixed—check whether your rate is locked at closing or fixed at conversion.
  • Conversion rates: Some loans lock the permanent rate at loan closing; others set the rate at the time of conversion. Ask the lender to document how and when the permanent rate is set.

Eligibility and documentation

Lender underwriting for construction-to-permanent loans is similar to standard mortgages but adds construction-specific items: a signed construction contract, approved plans and specifications, a builder’s resume and insurance, and a detailed draw schedule. Lenders also verify income, assets, credit, and a debt-to-income ratio sufficient to cover the permanent mortgage (Consumer Financial Protection Bureau guidance). (CFPB)

Inspections, approval, and common delays

  • What inspectors check: progress against plans, code compliance, and whether the work matches the draw request. Missing permits, incomplete work, or code violations can delay disbursements.
  • Common delays: weather, supply-chain issues, contractor turnover, and inspector scheduling. To reduce delays, confirm permit status and maintain clear communication with your lender and builder.

Practical tips from experience

  • Build a buffer: Add 10–20% contingency for unexpected costs; lenders typically won’t cover overruns past the approved contract without amendment.
  • Confirm the rate trigger: Get the conversion and rate-lock terms in writing—knowing whether the permanent rate locks at closing or at conversion materially affects payment forecasts.
  • Use lender-approved inspectors and keep permits accessible: This speeds draws and reduces pushback from underwriting.
  • Vet contractors: Lenders favor experienced, licensed builders with clean draws history; a seasoned builder reduces inspection rejections and lien risk. In my practice, projects with documented builder warranties and clear lien waivers close faster.

Common mistakes and misconceptions

  • “You’ll automatically get a lower rate after conversion.” Not always—some loans lock the permanent rate only at conversion, and market movement can raise it. Always confirm rate terms.
  • “Construction loans always cost more.” Construction-phase interest and fees can be higher or structured differently, but the one-time-close approach may save overall closing costs versus two separate loans.

When construction goes over budget or timeline

  • Overruns: Borrowers usually must pay cost overruns from savings or additional financing unless the lender pre-approved higher contingencies. Discuss change-order protocols with your lender and builder.
  • Extensions: If construction exceeds the loan’s expected term, lenders may grant extensions for a fee and additional documentation, but approval is not guaranteed.

Short FAQs

  • How many draws are typical? Three to eight draws is common, but complexity drives more frequent, smaller draws.
  • Who inspects work? Lenders use in-house or third-party inspectors; local building inspections also matter for permits and certificate of occupancy.

Internal resources

Sources and further reading

  • Consumer Financial Protection Bureau — guidance on construction lending and borrower protections (consumerfinance.gov). (CFPB)
  • U.S. Department of Housing and Urban Development (HUD) — programs and requirements for construction-insured mortgages (hud.gov). (HUD)

Professional disclaimer

This article is educational and not personalized financial advice. Discuss your project with a mortgage professional, builder, and (if needed) a financial planner to confirm suitability for your situation.