Overview

A construction-to-permanent mortgage (also called a construction-perm) combines short-term financing for building with a permanent mortgage in one product. During construction the lender releases funds in staged draws tied to inspections and milestones; once construction is complete the loan converts to a standard amortizing mortgage (commonly 15- or 30-year). This reduces closing costs, avoids requalifying for a second loan, and centralizes underwriting and title work.

How the loan is structured and disbursed

  • Loan setup: Underwriting covers both construction costs and permanent mortgage approval. Lenders require detailed plans, budgets, a construction schedule, and builder qualifications.
  • Draw schedule: Funds are released in stages (foundation, framing, rough-in, final) after inspections. Interest is usually charged only on funds advanced during construction.
  • Interest during construction: Borrowers typically pay interest-only on the outstanding construction balance; interest is calculated on each draw until conversion.
  • Conversion: At completion (certificate of occupancy or final inspection), the lender converts the construction balance to the permanent mortgage without a second major closing—though some lenders charge a conversion fee.

In my experience working with borrowers and builders, well-documented draw schedules and timely inspections are the biggest operational drivers of a smooth conversion.

Key terms explained

  • Draw: A scheduled disbursement of loan funds to pay for a completed portion of work. Inspections and lien waivers are commonly required before a draw.
  • Interest reserve: An optional portion of the loan set aside to pay construction-period interest so the borrower isn’t billed monthly during the build.
  • Conversion date: The moment the loan is formally changed from construction status to permanent mortgage status (often tied to final inspection or CO).

Eligibility and documentation

Lenders usually want:

  • A complete construction budget and timeline
  • Signed construction contract and builder credentials
  • Land title or proof of land ownership
  • Strong credit score and debt-to-income ratio consistent with permanent loan underwriting
    Down payment requirements vary; many lenders expect 15–25% equity depending on land value and borrower risk profile.

Benefits and trade-offs

Benefits:

  • One loan, one set of closing costs; no refinancing required after construction
  • Ability to lock a permanent rate or a rate option up front (varies by lender)
  • Simpler underwriting and title work compared with two separate loans
    Trade-offs:
  • More documentation up front versus a simple mortgage
  • Lenders may require higher down payments and stricter builder vetting
  • Construction interest and fees during the build add to overall cost

Practical tips and professional strategies

  1. Build a conservative budget: include contingencies of 10–20% for overages.
  2. Negotiate the draw schedule with your builder before closing to minimize disputes.
  3. Ask about an interest reserve to avoid monthly interest payments during slow builds.
  4. Confirm whether the permanent rate is locked at closing or set on conversion; get this in writing.
  5. Shop lenders for conversion fees, inspection frequency, and maximum allowable overrun coverage.

Common mistakes to avoid

  • Underestimating soft costs (permits, utility hookups, landscaping).
  • Failing to secure lien waivers after each draw — this exposes you to contractor lien risk.
  • Assuming every lender offers the same conversion terms; small fee and timing differences can matter.

Real-world example

A borrower finances a $500,000 build with a construction-to-perm loan: during the 8-month build they receive four draws tied to completed milestones and pay interest on the outstanding balance. When the builder obtains a certificate of occupancy, the lender converts the outstanding balance into a 30-year fixed mortgage, and principal plus interest payments begin according to the permanent amortization schedule.

Quick checklist before you apply

  • Finalized plans and a contractor agreement
  • Detailed budget and contingency funds
  • Copies of builder license and insurance
  • Clear title to land (if applicable)

Further reading and related FinHelp guides

Sources and authority

  • Consumer Financial Protection Bureau — guidance on construction loans and what consumers should expect (Consumer Financial Protection Bureau)
  • Fannie Mae Selling Guide — underwriting and eligibility conventions for construction-permanent loans (Fannie Mae)

Professional disclaimer: This article is educational and does not replace personalized financial or legal advice. For loan-specific guidance, consult a mortgage professional or financial advisor familiar with construction financing.