What Is a Construction-to-Permanent Loan?

A construction-to-perm loan is a construction loan for homebuilding that simply modifies (or rolls) to the permanent loan at the end of the construction phase without an actual second closing for the permanent loan.

Significance

The interest rate during the construction phase is usually different from the permanent (or modified) rate, although there have been programs where the rate was the same, locked in before construction begins.

Benefits

Construction-to-Perm lending is advantageous in a number of ways: it saves you two separate closing costs by only closing once and incorporating land purchase (or payoff), the construction loan and the permanent closing.

Time Frame

All cost analysis, builder approval, description of materials, contracts, blueprints, appraisal and problems have to be solved prior to closing. Because of all of the details needing to be resolved up front, this loan can be time consuming to get to closing.

Requirements

You need all of your builder information, such as licensing and insurance. An appraisal must be done on the blueprints on your lot as though the house was sitting there. Also, all the standard loan documents to qualify for the permanent loan and proof of down payment funds are required. FHA requires 3.5 percent of the total of cost to build, but most conventional lenders will require at least 10 percent of the total at this time.

Types

The construction to perm loan can be used to build any type of residential home that the banking institution will approve. This can include manufactured homes, (both mobile and modular) as well as log homes and standard types of homes. It also can be used with prefabricated home packages.