Background and why it matters

Construction-to-permanent loans—often called one-time-close loans—exist to streamline financing for new-home builds. In my 15+ years working with mortgage clients, these loans remove the need for separate short-term construction debt and later refinancing into a mortgage. That reduces closing costs, limits lender requalification, and can lock an interest rate earlier in the process.

How it works (step-by-step)

  • Prequalification and approval: Lenders evaluate your credit, income, assets, and the builder’s qualifications. You typically submit construction plans and a detailed budget. (See lender requirements in more detail in our guide on Preparing an Application for Construction-to-Permanent Financing).
  • One-time close: The loan closes once. During the building phase the lender disburses funds in draws tied to construction milestones.
  • Draws and inspections: Lenders pay the builder (or borrower) in stages after inspections and invoices. Monthly interest-only payments are common during construction.
  • Conversion to permanent mortgage: When construction completes and final occupancy or appraisal is approved, the loan converts into the permanent mortgage with the agreed rate and term.
  • Rate locks: Some lenders let you lock the final mortgage rate at closing (one-time-lock) or at conversion—confirm this up front because policies vary.

Details borrowers should know

  • Draw schedule and inspections: Lenders usually require builder invoices, lien releases, and on-site inspections before each draw. Mismanaged draws are a frequent source of delays.
  • Interest during construction: Most plans are interest-only on the amount disbursed. That keeps payments lower during building but raises total interest cost if construction runs long.
  • Closing costs: Expect initial closing costs at the one-time close and potential final closing fees when the loan converts. One-time-close loans typically reduce duplication of fees compared with two separate loans.

Real-world example

If you borrow $300,000 to build a house, the lender will release portions of that total across several draws (for foundation, framing, systems, and finish work). You pay interest only on the amounts already paid out. When the home is complete, the outstanding balance converts to a 30-year mortgage and you begin principal-and-interest payments.

Who is eligible

  • Typical private-lender expectations: credit scores often 620–680+ (but requirements vary by lender and loan program).
  • Down payment: many lenders require 5%–20% down; government-backed one-time-close options (FHA, VA, USDA) can allow lower down payments or different qualifying rules—check program specifics.
  • Debt-to-income (DTI): most lenders prefer DTI under roughly 43%–50%, though automated underwriting and program type affect limits.

Note: program availability and underwriting vary. Government-backed options (FHA/VA/USDA) offer one-time-close construction loans in some cases—confirm eligibility with your lender or the program administrator (see resources from the Consumer Financial Protection Bureau and HUD).

Professional tips to reduce risk

  • Shop multiple lenders and compare whether the rate locks at closing or at conversion. Ask for a written explanation of fees and timing.
  • Vet the builder: request references, license and insurance proof, and a construction schedule tied to draw milestones.
  • Build a contingency: set aside 5%–15% for change orders and overruns—many projects need more than planned.
  • Understand the draw process: require documentation (invoices, lien waivers) and independent inspections to avoid payment disputes.

Common mistakes borrowers make

  • No detailed budget: lenders and underwriters want line-item budgets; vague estimates delay approval.
  • Assuming all rates lock early: some lenders only lock the permanent rate at conversion, exposing you to market risk.
  • Skipping builder vetting: choosing a low-cost builder without proper credentials increases the chance of construction delays and lien problems.

FAQs

1) What down payment do I need?

  • It depends on lender and program. Private lenders often ask 5%–20% down; FHA one-time-close loans have different requirements. Always confirm with your lender.

2) How long does conversion take?

  • Conversion timing depends on inspections, final appraisal, and local occupancy approvals; commonly a few weeks after substantial completion.

3) Can I make changes during construction?

  • Yes, but change orders usually increase the budget and may require lender approval. Unapproved changes can halt draws.

Further reading and internal resources

Professional disclaimer

This article is for educational purposes only and does not constitute personalized financial, legal, or tax advice. Loan terms, underwriting rules, and program details change; consult a mortgage professional, your lender, or a certified financial planner before making decisions.

Authoritative sources

(Additional state, lender and program rules apply; always confirm current requirements with your lender.)