Construction-to-Permanent Loan 2026: One-Time Close Guide (Build Your Dream Home)

How Construction-to-Permanent Loans Work

Pre-Approval & Planning (2-3 months)

What you need: Detailed house plans, builder contract, itemized budget, land appraisal (if owned), construction timeline.

📋 Required Documents

• House plans: Architectural drawings, blueprints
• Builder info: License, insurance, references, past projects
• Budget: Line-by-line construction costs
• Timeline: Start date, milestones, completion date
• Land: Purchase contract or deed (if owned)
• Personal: Income, assets, credit, employment

Single Closing (1 day)

What happens: Close on construction loan + permanent mortgage in one transaction. Lock interest rate for entire loan term (30 years).

💰 Closing Costs

Typical: 2-5% of loan amount

Example: $400K loan = $8K-$20K closing costs

Includes: Origination, appraisal, title, inspection, survey

✅ Save $3K-$5K vs two closings (construction + permanent)

Construction Phase (6-12 months)

Draw schedule: Lender releases funds in stages as construction progresses. Typically 4-6 draws. Inspector verifies work before each draw.

🏗️ Typical Draw Schedule

• Draw 1 (10%): Foundation complete
• Draw 2 (25%): Framing, roof complete
• Draw 3 (25%): Rough plumbing, electrical, HVAC
• Draw 4 (20%): Drywall, insulation complete
• Draw 5 (15%): Cabinets, fixtures, flooring
• Draw 6 (5%): Final inspection, certificate of occupancy

Your payment: Interest-only on drawn amount. Example: $200K drawn at 7% = $1,167/month interest.

Conversion to Permanent Mortgage (Automatic)

What happens: When construction complete + final inspection passed, loan automatically converts to permanent mortgage. No new closing, no new application.

🏠 Permanent Mortgage Phase

Payment changes: Interest-only → principal + interest

Example: $400K loan at 7%, 30 years = $2,661/month

Rate: Locked at closing (6-12 months earlier)

Term: Typically 30 years from conversion date

✅ No new closing costs, no new appraisal!

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Requirements & Qualifications

✅ What You Need to Qualify

1. Credit Score: 700+ (Conventional), 580+ (FHA)

Conventional: 700+ for best rates, 680 minimum. FHA one-time close: 580+ with 3.5% down, 500-579 with 10% down. Why higher than regular mortgage: Construction loans = higher risk.

2. Down Payment: 20% (Conventional), 3.5-10% (FHA)

Conventional: 20% typical, 10-15% possible with higher rate. FHA: 3.5% (580+ credit) or 10% (500-579 credit). Example: $400K total cost = $80K down (conventional) or $14K down (FHA).

3. Detailed Plans & Budget

Required: Architectural plans, builder contract, itemized budget (foundation, framing, plumbing, electrical, etc.), construction timeline. Why: Lender needs to verify project feasibility + appraise future value.

4. Licensed, Insured Builder

Required: Builder must be licensed, insured, experienced. Lender checks: License status, insurance coverage, past projects, references. Owner-builder: Some lenders allow if you have construction experience + detailed plan.

5. Debt-to-Income Ratio: 43% Max

Calculation: (Monthly debts + future mortgage payment) ÷ gross monthly income. Example: $8K income, $2,661 future payment + $500 other debts = 39.5% DTI ✅. During construction: Based on interest-only payment.

💡 FHA One-Time Close Option

Lower requirements: 580+ credit, 3.5% down, 43% DTI. Benefits: More accessible for first-time builders. Drawbacks: MIP required (mortgage insurance), stricter property standards, fewer lenders offer it.

Example: $400K total cost. FHA = $14K down (3.5%) vs conventional = $80K down (20%). But FHA has MIP $333/month for life of loan. Compare conventional vs FHA construction loans.

Frequently Asked Questions

What is a construction-to-permanent loan?

Single loan that finances land purchase + construction + converts to permanent mortgage. Also called: One-time close, single-close construction loan. How it works: (1) Close once, (2) Draw funds during construction (6-12 months), (3) Pay interest-only during build, (4) Automatically converts to permanent mortgage when complete. Benefits: One closing = save $3K-$5K, lock rate upfront, simpler process. Requirements: 700+ credit (conventional) or 580+ (FHA), 20% down (conventional) or 3.5% (FHA), detailed plans/budget, licensed builder. Rates: 6.5-7.5% (2026). Get construction loan quote.

How much do I need for a down payment on a construction loan?

Conventional: 20% typical (10-15% possible with higher rate). FHA one-time close: 3.5% (580+ credit) or 10% (500-579 credit). Example: $400K total cost (land + construction). Conventional = $80K down (20%). FHA = $14K down (3.5%). What counts as down payment: Cash, owned land equity, gift funds (with letter). Why higher than regular mortgage: Construction loans = higher risk (project may not complete, cost overruns). Lower down payment options: FHA one-time close (3.5%), VA construction loan (0% for veterans), USDA construction loan (0% for rural areas). Trade-off: Lower down = higher rate + mortgage insurance.

Can I be my own builder with a construction loan?

Maybe, depends on lender. Owner-builder requirements: (1) Construction experience: Must prove you have skills/knowledge. (2) Detailed plan: Complete plans, budget, timeline, subcontractor contracts. (3) Higher down payment: 25-30% (vs 20% with licensed builder). (4) Fewer lenders: Many don't allow owner-builder. (5) Higher rate: 0.5-1.0% higher than with licensed builder. Why difficult: Higher risk of project failure, cost overruns, delays. Alternative: Act as general contractor, hire licensed subs. Some lenders allow this with 20% down. Best option: Use licensed builder if first-time building. Save money long-term with fewer issues.

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