How do construction-to-permanent mortgages work and what is a draw schedule?
Construction-to-permanent mortgages (also called “one-time close” loans) combine short-term construction financing with long-term mortgage financing into one loan file, one closing, and—typically—one set of closing costs. During the build phase the lender disburses money in stages (draws) as construction milestones are completed. When construction finishes, the loan converts to a permanent mortgage without a separate refinance closing.
In my 15 years in lending, I’ve seen this product reduce friction for borrowers who want predictable closing costs and simpler administration. Rather than juggling two lenders, two sets of closing fees, and a mid-project refinance, borrowers keep a single relationship and single underwriting package.
Sources: Consumer Financial Protection Bureau overview of construction loans and conversion options (https://www.consumerfinance.gov/), HUD resources on construction lending standards (https://www.hud.gov/).
Step-by-step: the typical process
- Pre-approval and planning: You and your lender review income, credit, plans, and an estimated budget. The lender orders an appraisal based on the completed-home value, not the lot-only value.
- One closing, two phases: At the one-time close you execute a loan that contains both a construction credit line and the future permanent mortgage terms (or at least an outline of them).
- Construction draws: The lender pays the builder in stages (draws) after on-site inspections confirm milestone completion.
- Interest during construction: Borrowers generally make interest-only payments on the funds disbursed during construction. The permanent mortgage payments begin after conversion.
- Conversion: Once final inspections and any lender punch-list items are completed, the loan automatically converts to the permanent mortgage—no second closing in many cases.
Draw schedules: what they are and why they matter
A draw schedule is the lender-approved plan that ties percent of the total construction loan to specific completion milestones. Lenders use draw schedules to manage risk: they only release money when work is verified. Typical milestones include foundation, framing, rough mechanicals, and final completion.
Common example (varies widely by lender and scope):
- Foundation: 15–25%
- Framing: 20–25%
- Rough-in (electrical, plumbing, HVAC): 20–25%
- Interior finishes and final inspection: 25–40%
These percentages are illustrative. In my experience, custom homes and projects with unique scope often require more frequent, smaller draws to match cash flow and subcontractor pay schedules.
Inspections and documentation for each draw
Lenders typically require an inspector, third-party draw administrator, or a loan officer visit before approving each draw. Common requirements include:
- On-site inspection report or photographs
- Contractor invoice(s) matching the work completed
- Lien waivers or conditional lien waivers from the builder/subcontractors (to confirm bills are paid)
- Updated schedule of values (a detailed cost breakdown)
Expect lenders to hold back retainage in some cases (a small percentage of each draw kept until final completion) to ensure punch-list items are addressed.
Interest, payments, and cost mechanics
- Interest during construction: Most construction-to-perm loans charge interest only on funds disbursed during the build. That means early draws produce smaller interest charges than later, larger draws.
- Conversion payment reset: When the loan converts, interest accrues on the full principal and the borrower begins regular principal-and-interest payments (unless the permanent product is interest-only, which is uncommon).
- Rate locks: Lenders may offer to lock the permanent rate at closing (one-time close) or keep it fluid with a later lock date. Locking early reduces rate risk but may cost more.
One-time close vs. two-closing approach
The one-time close (construction-to-perm) avoids a second closing and additional fees. The two-close method uses a short-term construction loan and requires a separate end-loan closing and new rate. Both have pros and cons:
- One-time close advantages: single underwriting, single set of closing costs, simpler administrative flow.
- Two-close advantages: you can lock a long-term rate later (if you expect rates to fall) or shop multiple permanent lenders after construction.
FinHelp related reading: learn more about the differences at our One-Time Close Construction Loan page (internal link: one-time close construction loan).
Who qualifies and required documents
Eligibility criteria are similar to standard mortgages but sometimes stricter because of construction risk. Typical lender requirements include:
- Credit score: often 620+ for conventional products; programs vary for government-backed options.
- Down payment: commonly 10–25% for conventional construction-perm, though some government or portfolio lenders can reduce this requirement.
- Income and assets documentation: pay stubs, tax returns, bank statements, and reserves sufficient to cover mortgage payments plus construction contingencies.
- Detailed construction contract and plans: signed builder agreement, contractor license, itemized budget, and timeline.
In practice, lenders also review builder qualifications and insurance (general liability and builder’s risk). If your builder lacks experience, lenders may require additional oversight or withhold more funds.
Planning your budget and contingency reserves
Construction budgets often face unexpected costs. I advise clients to:
- Add a 5–15% contingency line to your budget for change orders or unforeseen site issues.
- Verify what change-order approvals your lender requires. Some lenders insist on pre-approval for changes that increase loan amounts.
- Monitor your draw schedule against actual progress regularly to avoid cash flow gaps.
Common mistakes and how to avoid them
- Assuming full loan funds are available at once. Draw schedules govern disbursements; mismanaging cash flow leads to delayed payments to subcontractors.
- Choosing an unproven builder. Delays and rework increase draws and may trigger more inspections or retainage.
- Skipping lien waivers and documentation. Without clear paperwork, lenders can delay draws or demand reserves.
- Not understanding rate lock choices. Failing to lock a rate on the permanent loan can leave you exposed to higher interest costs.
For more about tracking disbursements and draw administration, see our Construction Loan Monitoring article (internal link: construction loan monitoring).
Typical timeline
Timelines vary by project size, permitting requirements, and weather, but a common pattern is:
- Planning & permits: 1–3 months
- Foundation through framing: 1–3 months
- Rough-in to finishes: 2–4 months
- Final inspections & conversion: 2–6 weeks
Total build time for an average single-family home: 6–9 months, sometimes longer for custom or complex projects.
Frequently asked questions (brief answers)
- What happens if construction goes over budget? You may need to increase the loan (subject to lender approval), use savings, or secure a separate loan. Many lenders will not increase the loan mid-build without a new appraisal and underwriting.
- Can I make changes during construction? Yes, but most lenders require written change orders and may need to approve increases that affect loan amount.
- Who pays interest during construction? The borrower pays interest on the disbursed portion. Builders do not typically pay interest on draws unless contractually agreed.
Practical checklist before you apply
- Get pre-approved so you know price and down-payment bands.
- Select a licensed, insured builder with references and verifiable past projects.
- Prepare a realistic budget with a 5–15% contingency.
- Discuss rate lock options and closing cost expectations with your lender.
Final notes and professional disclaimer
Construction-to-permanent mortgages simplify financing by combining two loans into one closing and coordinated draw schedule. They work best when borrowers and builders maintain clear communication and when borrowers plan for contingencies.
This article is educational and based on lender practices and my experience in mortgage lending. It is not personalized financial advice. For guidance tailored to your situation, consult a mortgage professional, attorney, or financial advisor.
Authoritative resources:
- Consumer Financial Protection Bureau, “Construction loans” (https://www.consumerfinance.gov/)
- U.S. Department of Housing and Urban Development (HUD) guidance on construction lending (https://www.hud.gov/)
Internal resources:
- One-Time Close Construction Loan: https://finhelp.io/glossary/one-time-close-construction-loan/
- Construction Loan Monitoring: https://finhelp.io/glossary/construction-loan-monitoring/
- Multi-Draw Construction Loan: https://finhelp.io/glossary/multi-draw-construction-loan/
Professional disclaimer: This content is for educational purposes only and does not replace advice from licensed professionals. Rules, rates, and underwriting standards change—confirm details with your lender.
