Construction-to-permanent Loan
Definition and meaning of Construction-to-permanent Loan in real estate.
A construction-to-permanent loan is a single-close financing option that funds the building of a home and then automatically converts into a long-term mortgage once construction is complete. This option allows the borrower to close on both the construction phase and the permanent financing at the same time.
In more detail
By combining two loans into one, the borrower pays only one set of closing costs, saving both time and money. During the building phase, the borrower typically makes interest-only payments on the funds disbursed. Once the home is built and receives a certificate of occupancy, the loan transitions into a traditional mortgage, such as a fixed-rate or adjustable-rate loan.
Lenders usually require a substantial down payment and a thorough review of the builder credentials before approving this type of loan.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Single-close construction loan |
| Closing costs | Paid once at the start of the loan |
| Requirements | Detailed construction plans, licensed builder, and a certificate of occupancy |
A buyer applies for a single loan that pays the builder to construct a house over several months and then transitions into a traditional fixed-rate mortgage when the buyer moves in.
Frequently asked questions
What is the main benefit of a construction-to-permanent loan?
The primary benefit is that you only close once. This means you pay one set of closing costs and avoid the hassle of qualifying for and closing two separate loans.
What happens if construction takes longer than expected?
Many lenders offer a builder timeline buffer, but if delays exceed the terms of the agreement, the borrower may face fee penalties or need to negotiate a loan extension.