How do you refinance short-term construction debt into permanent financing?

Refinancing construction debt turns a short-term, interest-only construction loan into a longer-term, amortizing loan (a permanent mortgage). The permanent loan improves cash flow, reduces interest exposure, and shifts the borrower from a construction lender’s oversight to a long-term servicer.

In my practice advising developers for 15 years, the projects that closed smoothly started preparing the refinance 90–180 days before the construction loan matured.

Step-by-step refinancing checklist

  1. Confirm eligibility and timing
  • Permanent lenders usually require project completion, final inspections, a certificate of occupancy (CO), and clear title before funding. Start outreach to permanent lenders at least 3–6 months before construction loan maturity. (See CFPB guidance on mortgage timelines.)
  1. Stabilize the asset
  • For rental or condo projects, get occupancy or a minimum stabilized rent roll. For owner-occupied or sales projects, provide evidence of sales contracts or appraisal-backed value.
  1. Gather and clear documentation
  • Typical documents: final construction budget, paid invoices and lien waivers, CO, final contractor agreements, insurance certificates, financial statements, and an as-built appraisal.
  1. Shop lenders and lock terms
  • Compare interest rates, amortization, prepayment terms, and lender fees. Ask about rate locks and float-down options if you expect rates to move.
  1. Order appraisal and underwriting items early
  • Appraisals, environmental reports, and survey updates often take several weeks. Missing items are the most common cause of delay.
  1. Close and payoff
  • Coordinate payoff of the construction loan, release of construction-side covenants, and proper recording of the permanent mortgage. Expect a separate closing for the permanent loan unless you used a one-time-close product.
  1. Post-close servicing and escrows
  • Confirm who will service the loan and how property taxes and insurance escrows will be handled.

Closing checklist (documents and conditions lenders commonly require)

  • Final construction draw schedule and paid invoices
  • Final certificate of occupancy (or equivalent)
  • Appraisal and underwriting package
  • Updated title search with lien releases
  • Evidence of property insurance and liability coverage
  • Borrower financial statements and corporate/ownership docs

For detailed lender rules, see our guide on converting a construction loan to a permanent mortgage.

Common traps and how to avoid them

  • Missed deadlines and extensions: waiting until the last minute can force costly construction loan extensions or higher interim rates. Start lender outreach early.
  • Unreleased liens and unpaid subcontractors: unresolved mechanic’s liens will derail closings; get lien waivers and final contractor releases.
  • Delayed certificate of occupancy: plan inspections and final utility sign-offs early; unresolved code issues block permanent funding.
  • Rate and market shifts: if rates rise, your refinance terms can worsen—use rate locks or consider a short-term interest-rate hedge.
  • Covenant and structural surprises: lenders will re-underwrite; any deviations from the approved plans (change orders, cost overruns) must be documented and explained.

If you need ideas on wrapping up construction-specific items, our construction loan closeout article explains common closeout tasks and documentation.

Typical costs and timing

  • Timeline: allow 60–120 days for underwriting and closing after you engage a permanent lender, longer if there are title or entitlements issues.
  • Fees: appraisal, title, survey, underwriting, and closing costs. Costs vary with loan size—budget for several thousand dollars to low single-digit percentage points of loan amount on larger loans.

When refinancing may not be possible

  • Project not complete or lacking CO
  • Unacceptable environmental or title defects
  • Borrower creditworthiness has materially declined
  • Market value is below outstanding debt and no additional equity is available

Short real-world example

A mid-rise developer I advised moved from a 12‑month construction loan to a 30‑year fixed permanent loan by starting lender conversations when the project was 70% complete. Early appraisal ordering and a focused lien‑waiver push cleared title issues and saved several weeks—and avoided an extension fee.

Professional tips

  • Start early: contact at least three permanent lenders and get conditional term sheets while construction finishes.
  • Clean title early: obtain conditional lien releases from major trades during final draws.
  • Negotiate prepayment options: preserve optionality to sell or refinance again later.
  • Use a one-time-close product only when it fits your capital plan; otherwise expect two closings.

Professional disclaimer

This article is educational and not personalized financial, legal, or tax advice. For transaction-level guidance, consult a qualified mortgage professional, real estate attorney, or financial advisor.

Authoritative sources

  • Consumer Financial Protection Bureau — mortgage basics and timelines (consumerfinance.gov)
  • Fannie Mae — construction and permanent financing guidance (fanniemae.com)
  • U.S. Department of Housing and Urban Development — construction and mortgage resources (hud.gov)