Background and purpose
Construction-to-permanent financing (also called a one-time close or construction-perm loan) streamlines borrowing by combining construction funds and the permanent mortgage into a single loan. Lenders underwrite both the build and the finished home up front so the loan converts automatically at completion, avoiding a second closing and duplicate closing costs. This saves time and often money but requires more detailed documentation at application.
What lenders expect in an application
- Project package: architectural plans, specifications, permit-ready drawings, and a realistic timeline.
- Contractor documentation: signed fixed‑price contract or detailed bid from a licensed general contractor, proof of contractor insurance and licensing, and subcontractor lists.
- Budget and contingency: an itemized construction budget (hard and soft costs) and a contingency reserve (commonly 5–15%).
- Draw schedule: staged disbursements tied to inspections or milestones (foundation, framing, mechanicals, drywall, final). Lenders use draws plus on-site/third‑party inspections to release funds.
- Borrower credentials: two recent years of tax returns, recent pay stubs, W-2s, bank statements, asset statements, credit report authorization, and employment verification.
- Collateral and value evidence: land deed or purchase contract, recent appraisal or construction‑to‑value estimate. During construction lenders focus on Loan‑to‑Cost (LTC); the permanent phase uses Loan‑to‑Value (LTV).
Key steps and timeline
- Pre-qualification and lender selection
- Get pre‑qualified to understand how much you can borrow and which loan products (one‑time close vs. separate loans) a lender offers. Choose a lender experienced in construction loans — their processes and inspector panel matter.
- Assemble the application package
- Gather plans, permits (or permit application), contractor contract, itemized budget, draw schedule, insurance certificates, and your financial documents.
- Underwriting and appraisal
- Lenders underwrite both borrower creditworthiness and the project. Expect a construction appraisal or builder’s estimate. The lender will evaluate LTC during construction and LTV for permanent conversion.
- Closing and construction
- Initial closing funds the first draw or interest reserve (if applicable). The lender will release draws per schedule after verification and construction inspections.
- Conversion to permanent mortgage
- After final inspection, certificate of occupancy, and final appraisal, the lender converts the loan to the permanent mortgage. Confirm timing and any rate lock/float details with your lender.
Practical checklist you can use
- Pre‑approval letter from lender
- Site plan and architectural drawings
- Signed construction contract with payment schedule
- Detailed cost estimate and contingency
- Permits or permit application receipts
- Proof of borrower income, assets, and identity
- Land title and homeowners insurance
- Builder license and insurance documentation
- Proposed draw schedule and inspection plan
Common application pitfalls (and how to avoid them)
- Underestimating cost overruns: add a 10–15% contingency to your budget and budget for soft costs (permits, utility hookups, landscaping).
- Weak contractor documentation: lenders prefer fixed‑price contracts with an experienced GC and clear warranties.
- Missing permits or delayed inspections: start permit applications early; inspections gate draw releases.
- Confusing LTC with LTV: lenders price and approve construction based on LTC but convert using LTV — review both metrics with your lender.
Professional tips from practice
- Use a lender who handles multiple construction‑to‑permanent loans—experience shortens underwriting and prevents surprises.
- Ask for a sample draw schedule and inspection checklist before signing the contract.
- Consider an interest reserve to avoid monthly interest payments during construction; verify who pays inspections and appraisal costs.
- Lock or float your permanent rate proactively. One‑time close loans may let you lock at closing for the permanent rate or provide a rate‑lock window.
Tools and terms to know
- Draw schedule: order and timing of partial disbursements tied to construction milestones. See our deeper guide on draw schedules for construction loans: Construction loans and draw schedules: How disbursements work.
- Loan‑to‑Cost (LTC): ratio lenders use during construction to limit advance amounts relative to total hard costs.
- Loan‑to‑Value (LTV): used at conversion to set permanent terms; learn more about LTV and pricing: Loan-to-Value (LTV): How lenders use it to set terms.
- One‑time close option: a single closing for construction and permanent financing; compare options here: One-Time Close Construction Loan.
FAQ (short answers)
Q: Who can qualify?
A: Owner‑occupants and investors who meet credit, income, and project underwriting standards; lender guidelines vary.
Q: What inspections are required for draws?
A: Inspections typically verify completed milestone work (foundation, framing, rough‑in, final). Lenders may use in‑house or third‑party inspectors.
Q: Can I change contractors mid‑project?
A: Possibly, but expect lender approval, a review of the new contract, and potential pause in draws until the new contractor is vetted.
Authoritative resources and where to read more
- Consumer Financial Protection Bureau — mortgage basics and model disclosures: https://www.consumerfinance.gov (CFPB).
- U.S. Department of Housing and Urban Development — policy and program information: https://www.hud.gov (HUD).
- National Association of Home Builders — construction industry best practices: https://www.nahb.org (NAHB).
Professional disclaimer
This article is educational and does not constitute individualized financial or legal advice. Your lender’s specific underwriting standards may differ; consult a mortgage professional or attorney for guidance tailored to your project.
Sources cited inline: CFPB, HUD, NAHB. In my practice I’ve found that applicants who deliver a complete project package and work with experienced lenders reduce approval time and minimize cost surprises.
