Construction-to-Permanent Loans
A Construction-to-permanent loan combines construction financing and long term financing into one loan. The loan has two distinct phases: the construction phase and the permanent phase.

The Construction Phase
Funds to purchase the construction lot or payoff the existing lot loan are advanced at the closing of the construction-to permanent loan. During the construction phase advances (or draws) are made from the loan to pay the builder for labor and materials completed on the home. Generally, advances are made about 4 to 7 times during the construction phase.

The length of the construction phase will vary from six to 12 months depending on the size and complexity of the home. When the home is completed the final advance is made to the builder and the loan is modified from the construction phase to permanent financing.

 The Permanent Phase
When the home is completed the loan is modified to provide long term financing. The types of permanent financing or loan program options are usually determined when the loan closes. The interest rate is pegged at the loan modification.

There are a wide variety of construction-to-permanent plans, many of which cap interest rate maximum for the permanent financing as well as other options to lock-in an interest rate when the loan closes.

Construction-to-Permanent Advantages
  • One closing may reduce closing costs
  • One application package and approval
  • Predetermined permanent financing packages
Construction-to-Permanent Disadvantages
  • Limited permanent financing options
  • Higher permanent interest rate
  • Less flexibility during construction loan phase
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Other Considerations
Three options exist in building a new home:
  • Contract with the builder to purchase the home and the builder finances the construction. The home is purchased from the builder once it is completed; or
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  • Obtain a construction loan and contract with a builder to build the home. When the home is completed a new mortgage loan pays off the construction loan; or
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  • Obtain a construction-to-permanent loan and contract with a builder to build the home.

By providing the construction financing for a home, a borrower assumes a much higher degree of risk in building a home. Delays due to weather, back orders or sub-contractor problems will increase the amount of interest paid during the construction phase (for either a construction-to-permanent or a construction loan). Careful analysis of the entire project including all financing options is a must.

For more information on construction-to-permanent financing options call Home Mortgage.
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