Overview

Construction-to-permanent mortgages (often called “one-time close” or “construction-to-perm”) let a borrower obtain construction financing and permanent mortgage financing in a single loan package. During construction the lender issues draws to the builder or borrower as work milestones are completed; after the home is finished and a certificate of occupancy is issued, the loan converts to a standard mortgage without a second closing. This structure reduces duplication of closing costs and removes the risk of requalification between construction and permanent financing (Consumer Financial Protection Bureau, CFPB).

In my practice helping clients finance owner-built and custom-home projects, I’ve seen this product work well for buyers who want predictability and fewer closings. That said, it’s not a one-size-fits-all solution: lender experience, appraisal requirements, and the borrower’s cash reserves all shape the outcome.

(Authoritative resources: CFPB guides on construction loans, HUD/FHA one-time close program information.)

Step-by-step: How a construction-to-permanent mortgage works

  1. Prequalification and lender selection
  • Start by prequalifying with lenders who specialize in construction loans. Not every mortgage lender offers construction-to-perm products; community banks and specialized mortgage lenders are common sources. Ask about deposit requirements, draw inspection procedures, and whether the lender will require a licensed builder (many do).
  1. Application, underwriting, and construction budget
  • You submit typical mortgage documentation (income, assets, credit) plus a detailed construction contract, plans, and a cost breakdown. Underwriting evaluates your creditworthiness and the feasibility of the construction budget. Lenders will often require a contingency reserve (typically 5–15%) to cover overruns.
  1. Appraisal and loan structure
  • Appraisers review plans and cost estimates to establish an “as-completed” value. Lenders underwrite based on the future value of the finished property, not just the lot or unfinished structure. Loan-to-value (LTV) limits for construction-to-perm financing are often lower than for standard purchases; expect stricter LTV and higher down payment requirements in many cases.
  1. Closing once (construction close)
  • You complete one closing where the loan documents cover the construction period and the eventual permanent mortgage. Construction disbursements (draws) are specified in a schedule tied to inspection milestones.
  1. Construction phase (draws and inspections)
  • Funds are disbursed in stages to the builder or borrower as work is completed. Most lenders require an inspector or third-party draw administrator to verify progress before releasing funds. Interest payments during construction are usually interest-only and calculated on the outstanding balance.
  1. Certificate of occupancy and conversion
  • When the project meets local building codes and receives the certificate of occupancy, the lender completes the conversion to the permanent mortgage. At conversion the loan moves to principal-and-interest payments under the agreed permanent rate and term.
  1. Post-conversion considerations
  • Review the permanent mortgage terms (fixed vs adjustable rate, term length, monthly payment). Some loans let you lock the permanent rate at origination; others lock only at conversion—ask your lender for specifics.

Types and comparisons: One-time close vs two-loan approach

  • One-time close (construction-to-perm): Single closing, single set of underwriting requirements, single set of closing costs. Easier transition to permanent financing but may require stronger documentation and higher down payment.
  • Two-loan approach (construction loan then separate mortgage): You close a short-term construction loan and later apply for a separate mortgage. This can give more flexibility to shop permanent-rate options later but carries the risk of requalification and additional closing costs.

For more on draw procedures and inspection requirements, see our deeper guide on construction loan draws and inspections.

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Common pitfalls and how to avoid them

  1. Choosing the wrong lender
  • Pitfall: Working with a lender inexperienced with construction-to-perm loans can create delays, missed draws, and compliance issues.
  • Avoidance: Vet lenders for construction experience, request references, and confirm the frequency and process for inspections and draws.
  1. Underestimating total costs
  • Pitfall: Construction budgets often miss things—site work, utility hookups, permits, insurance, and change orders.
  • Avoidance: Build a contingency reserve (5–15%), get multiple contractor bids for major items, and budget for closing costs at conversion.
  1. Weak or incomplete construction contracts
  • Pitfall: A vague contract leads to disputes and draw holds.
  • Avoidance: Use a written, itemized fixed-price or guaranteed maximum price (GMP) contract. Require lien-waiver provisions and a clear payment schedule tied to measurable milestones.
  1. Poor communication with your builder or lender
  • Pitfall: Missed inspections or undocumented changes delay draws and can incur interest-only carry costs.
  • Avoidance: Maintain weekly check-ins, keep a change-order log, and track invoices and lien waivers for each draw.
  1. Not planning for rate changes at conversion
  • Pitfall: If your loan does not lock the permanent rate at closing, rates could rise before conversion.
  • Avoidance: Ask about rate-lock options: permanent-rate locks at closing, or conversion locks with fees. Consider interest-rate caps if the permanent loan is adjustable.
  1. Failing to qualify for the permanent mortgage
  • Pitfall: Life events (job change, new debt) between construction start and conversion can affect eligibility.
  • Avoidance: Avoid major credit changes, keep documentation updated for the lender, and maintain steady employment/income.

Eligibility and who benefits

  • Owner-builders versus hired builders: Many lenders prefer licensed builders; owner-builder projects face stricter underwriting and sometimes higher scrutiny or added requirements.
  • First-time builders: Programs exist for first-time homebuyers and certain government-backed loans; however, borrowers must still meet income, credit, and down payment rules.
  • Investors: Lenders typically treat investor-built homes differently, often requiring higher down payments and charging higher rates.

Government-backed options

  • FHA One-Time Close: FHA supports a “one-time close” construction loan for certain owner-occupied properties; this can reduce down payment requirements for eligible borrowers (HUD/FHA). VA and USDA also offer construction loan options in some cases—check agency guidance for eligibility and loan specifics.

(See HUD/FHA guidance on construction loans and CFPB resources for borrower protections.)

Costs to expect

  • Construction interest: Interest-only during the build, based on outstanding draws.
  • Conversion/closing fees: A conversion fee or a second set of closing costs may apply depending on the lender—confirm upfront.
  • Inspection fees: Paid per draw or bundled.
  • Builder retainage: Lenders or owners sometimes hold a percentage of the last draw until final punch list items are completed.

Practical checklist before you apply

  • Choose lenders with construction-to-perm experience and check online reviews.
  • Obtain a detailed construction contract with fixed-price or GMP terms.
  • Ensure your budget includes contingency funds, inspection fees, permits, and utility connections.
  • Ask the lender how and when the permanent rate is set and what fees apply at conversion.
  • Confirm builder licensing, insurance, and lien-waiver procedures.
  • Keep personal credit and employment stable from application through conversion.

Example (real-world, anonymized)

A client, “Alex,” used a construction-to-permanent loan to build a family home. Alex’s lender required a 10% contingency, staged draws tied to foundation, framing, and final inspections, and a third-party inspector for each draw. Interest-only payments kept monthly cash flow manageable during the build; once the certificate of occupancy was issued, the loan converted to a 30-year fixed-rate mortgage as agreed at closing. Two lessons from Alex’s case: document every change order and secure a contingency larger than the contractor recommends.

Frequently asked questions

Q: Can I lock the permanent mortgage rate at closing?
A: Some lenders offer rate locks at origination; others lock only at conversion. Lock terms and fees vary—get it in writing.

Q: What happens if construction overruns the budget?
A: You may use contingency reserves, add personal funds, or request an increase from the lender (which requires underwriting). Alternative options include short-term bridge financing or a home equity line once equity exists.

Q: Are taxes or mortgage interest treated differently during construction?
A: Interest paid on construction loans may be deductible if the loans meet IRS rules for acquisition indebtedness; consult IRS guidance or a tax advisor for your specific situation (IRS Publication on mortgage interest deductions).

Final thoughts and professional disclaimer

Construction-to-permanent mortgages can streamline financing for custom and owner-built homes by combining two financing steps into one. Success depends on working with an experienced lender and builder, realistic budgeting, and disciplined documentation.

This article is educational and based on industry practice and public guidance from agencies such as the Consumer Financial Protection Bureau (CFPB) and HUD/FHA. It does not replace personalized legal, tax, or mortgage advice. Consult a qualified mortgage professional, tax advisor, or attorney for guidance tailored to your situation.

Sources and further reading

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(Last reviewed: 2025).