Build Once, Finance Once: The Magic of Construction-to-Permanent Loans

Why Construction-to-Permanent Loans Are Game-Changers for Builders

Construction to perm loans combine construction financing and a permanent mortgage into one seamless transaction. Instead of juggling two separate loans with different lenders, rates, and closing costs, you get everything wrapped into a single package.

Here's what you need to know:

• One closing instead of two (saves $5,000-$15,000 in fees)
• Interest-only payments during the 6-12 month build phase
• Rate lock protection - your permanent mortgage rate is set upfront
• 20-30% down payment typically required
• Credit score of 680+ for most lenders
• Licensed builder approval from your lender

The construction phase works like this: your lender releases funds in stages (called "draws") as work gets completed and inspected. Once construction wraps up, the loan automatically converts to a standard 15 or 30-year mortgage - no second closing required.

The biggest win? You lock in your permanent mortgage rate before breaking ground. If rates rise during construction, you're protected. If they drop, many lenders let you float down to the lower rate.

I'm Daniel Lopez, a loan officer at BrightBridge Realty Capital, and I've helped dozens of investors and builders steer construction to perm loans for everything from custom homes to small multifamily projects.

Important construction to perm loans terms:- connecticut construction loans- real estate funding solutions- private funding for real estate investors

How Construction-to-Permanent Loans Work

Construction to perm loans have a simple two-phase structure that adapts to exactly what you need at each stage of your project.

Phase 1: Construction (6-18 Months)

During construction, you only pay interest on the money that's actually been disbursed. Your lender releases funds through a draw schedule tied to construction milestones.

The pre-construction draw often covers your land purchase (typically 65-75% of land cost). From there, you'll see draws for foundation completion, framing and roofing, mechanical systems, and the completion draw when you get your certificate of occupancy.

Each draw requires an inspection to verify work completion. Most lenders structure 4-6 draws total, and you only pay interest on what's been invested in your property so far.

Phase 2: Conversion to Permanent Mortgage

The conversion process happens automatically - no second closing, no scrambling for new financing, no additional closing costs.

Once you get your certificate of occupancy, your loan transforms into a traditional 15 or 30-year mortgage. The conversion requires a final inspection, updated appraisal, and verification that your credit documents are current.

Some lenders give you breathing room - if your credit score is 700+ and loan-to-value is 95% or below, they might accept documents up to 12 months old.

Benefits of Construction to Perm Loans

Construction to perm loans save you serious money and headaches compared to traditional two-loan financing.

One Set of Closing Costs

Traditional construction financing forces you through two separate closings with duplicate appraisals, title insurance, attorney fees, and loan origination costs.

With a single-closing construction to perm loan, you pay these fees once. We're talking about real savings of $5,000 to $15,000 that stays in your pocket.

Rate Lock Protection

You lock in your permanent mortgage rate the day you close, protecting you for the entire construction period. If rates jump during your build, you're protected. Many lenders offer float-down options - if rates drop significantly, you can capture the lower rate.

Streamlined Paperwork and Process

Construction to perm loans eliminate the double-application nightmare. You complete one application, submit one set of documents, and work with one loan team from groundbreaking to move-in.

Draw Schedule for Construction to Perm Loans

The draw schedule is where construction to perm loans release funds as your project hits specific milestones, protecting both you and the lender.

Milestone-Based Disbursements

Here's how a typical draw schedule breaks down:- Land and site prep: 10-15% (includes land purchase, clearing, utilities)- Foundation: 15-20% (poured, cured, and inspected)- Framing and roofing: 25-30% (the biggest chunk)- Mechanical systems: 15-20% (plumbing, electrical, HVAC)- Drywall and interior: 15-20%- Final completion: 10-15% (certificate of occupancy)

You only pay interest on money that's actually been used.

Holdback Rules and Lien Protection

Most places require lenders to hold back a portion of each draw to protect against mechanic's liens. In Canada, British Columbia's Builders Lien Act requires a 10% holdback on all payments for 45 days after completion.

In the U.S., holdback requirements typically range from 5-10% of each draw, released once lien periods expire.

Inspection Requirements

Every draw requires an inspection costing $150-$300 per visit. The process takes 1-3 business days from inspection request to fund release.

Construction to Perm Loans vs. Stand-Alone Construction & Conventional Mortgages

The two-closing option gives experienced builders flexibility to shop for the best construction loan terms, then hunt separately for permanent financing. However, you're gambling on future interest rates and lending standards.

Interest Rates & Payment Structures

Construction to perm loans typically run 1-5% higher than conventional mortgages, reflecting construction risk. During the build phase, you pay interest only on drawn funds. Once converted, you switch to regular principal and interest payments over 15-30 years.

The rate lock protection eliminates uncertainty about your permanent mortgage rate.

For detailed information, see FAQs: Construction-to-Permanent Financing | Fannie Mae.

Eligibility Requirements & Documentation

Construction to perm loans require:- Minimum credit score of 680 (many prefer 700+)- Down payment of 20-30% of total project cost- Licensed and insured contractor with solid references- Complete architectural plans, construction budget, signed contract, permits- Debt-to-income ratio under 43-45%

Budgeting, Costs, and Draw Management

Construction to perm loans require careful budgeting across three main expense categories:

Land and site work includes utility connections, soil testing, and site preparation - often $15,000+ before you pour concrete.

Soft costs typically run 15-20% of your budget: architectural fees, permits, legal costs, and interest during construction. On a $400,000 project taking eight months, expect $15,000-$20,000 in interest payments alone.

Hard costs represent 60-70% of your budget - materials, labor, and physical construction. This is where most cost overruns happen.

Smart borrowers build in a 10-15% contingency fund from the start.

Expenses Covered by a C2P Loan

Your construction to perm loan can cover land purchase (65-75% of value), site preparation, all construction materials and labor, architectural fees, building permits, builder's overhead and profit, basic landscaping, and manufactured home setup.

Handling Cost Overruns & Delays

Construction projects almost always go over budget or run late. Most lenders require you to cover overruns with cash, which is why that contingency fund is critical.

For delays, most lenders allow 6-month extensions for a fee of 0.5-1.0% of your loan amount. Weather delays are usually covered without penalty. The key is early communication with your lender.

Expenses Covered by a C2P Loan

Construction to perm loans are comprehensive, covering almost everything needed to go from raw land to move-in ready.

What Your Loan Can Cover

Land purchase (up to 65-75% of appraised value), site preparation including excavation and utilities, all construction materials and labor, architectural and engineering fees, building permits, builder's overhead and profit (10-20%), basic landscaping (often capped at 5%), and manufactured home setup on permanent foundations.

What You'll Need to Pay Separately

Furniture and personal property, temporary living expenses during construction, cost overruns beyond approved amounts, and owner labor don't qualify for loan proceeds.

Handling Cost Overruns & Delays

Maintain a 10-20% contingency fund outside your loan amount. Get lender approval for major change orders before work begins. For schedule delays, most lenders allow 6-month extensions for a fee.

Remember: you cannot increase your loan amount mid-project. Whatever you qualified for at closing is your ceiling.

Special Programs, Regional Rules & Risk Mitigation

Beyond conventional construction to perm loans, government-backed programs offer improved benefits for qualified borrowers.

Government-Backed Construction-to-Permanent Programs

FHA One-Time Close Construction Loans:- Down payment as low as 3.5% with 580+ credit score- 10% down payment with 500-579 credit score- Owner-occupancy required

VA One-Time Close Construction Loans:- No down payment for eligible veterans- No mortgage insurance required- Must be primary residence

USDA One-Time Close Construction Loans:- No down payment in eligible rural areas- Income limits apply (typically 115% of area median income)- Primary residence requirement

Risk Mitigation Strategies

Builder's Risk Insurance (1-4% of construction budget annually) protects against fire, theft, and weather damage. Performance Bonds guarantee project completion for larger projects. Lien Waivers from contractors prevent future claims.

Canadian Construction-to-Permanent Insights

Construction to perm loans work differently in Canada. The biggest difference is the 75% loan-to-value cap requiring at least 25% down. Provincial lien acts require mandatory 10% holdbacks on all payments for 45 days after completion.

Canadian lenders typically limit you to 4-6 draws maximum, requiring more strategic planning. The Canada Mortgage and Housing Corporation (CMHC) offers programs like the Rental Construction Financing Initiative for qualifying multi-unit projects.

Don't overlook provincial grant programs - Quebec's Downtown Housing Grant and various first-time builder incentives can improve your financing options.

U.S. Government-Backed Variants

FHA Construction-to-Permanent Details

FHA's 203(k) program allows 3.5% down with 580+ credit score or 10% down with 500-579 credit. They use mortgage insurance instead of requiring perfect credit, opening doors for more borrowers.

VA Construction Loan Benefits

Veterans get zero down payment and no mortgage insurance premiums. You can use your VA benefit multiple times for construction loans with remaining entitlement.

USDA Rural Development Programs

USDA offers zero down payment in eligible rural areas with income limits (typically 115% of area median income). Works well for first-time homebuyers in less expensive rural markets.

Frequently Asked Questions about Construction to Perm Loans

What happens if construction isn't finished on time?

Most construction to perm loans include built-in extension options. Lenders allow 6-12 month extensions for 0.5-1.0% of your loan amount. Weather delays are usually covered without penalty. The key is early communication with your lender.

Can I use a C2P loan for major renovations?

Construction to perm loans work best for new construction, but some lenders consider substantial renovations like complete gut renovations, major structural additions, or tear-down and rebuild scenarios. Simple remodels won't qualify.

How is the permanent mortgage rate determined?

Your permanent mortgage rate gets locked at initial closing, protecting you from rate increases during construction. Many lenders offer "float-down" options to capture lower rates if they drop during your build.

Conclusion & Next Steps

Construction to perm loans streamline building into one smart financial package that protects your budget and simplifies your life. Instead of juggling multiple loans and paying double closing costs, you handle financing once and focus on building quality properties.

At BrightBridge Realty Capital, we've built our construction lending program around speed, flexibility, and real-world understanding of what builders and investors need.

Here's what sets us apart:

Our fast closings mean you can move from approved plans to breaking ground in as little as one week. As direct lenders, we make in-house decisions and price competitively. We create customized solutions for your specific timeline, budget, and goals.

The secret to construction financing success? Start with realistic budgets, detailed plans, and experienced contractors. Partner with lenders who understand construction, not just mortgage lending.

Ready to build once and finance once? Let's talk about how a construction to perm loan can turn your project into a smooth, predictable process.

For detailed information about our construction lending programs, visit our ground-up construction financing page.