Construction-to-permanent loans: one closing, two closings and the 18-month clock
Financing a house that does not exist yet is a different underwriting problem: there is nothing to appraise, nothing to foreclose on for months, and a builder standing between the lender and the collateral. Conventional guidelines answer it with two structures — and the one you pick decides how many times you pay closing costs and how much rate risk you carry.
What the product is
A construction-to-permanent loan pays for the build in stages, then becomes the long-term mortgage on the finished house. During construction the money leaves in draws against inspected work; when the certificate of occupancy is issued, the loan converts to a standard amortizing mortgage that Fannie Mae or Freddie Mac can buy. That last point is what separates it from ground-up investor lending: it is ordinary conventional financing with a construction phase bolted onto the front, so the borrower has to meet ordinary conventional standards on credit, debt ratio and reserves, and the finished home has to be a normal one-unit residence, not a spec project. Investors building to sell are on a different track — see hard money new construction loans.
It is also not the same transaction as buying a to-be-built house from a production builder. There, the builder carries the construction financing on its own balance sheet and you close once on a finished home, as covered in our guide to buying new construction. A construction-to-permanent loan is for the case where you are the one borrowing to build, usually on a lot you own or are buying with the same money.
Single closing or two closings
Fannie Mae recognizes both structures, and lenders offer one, the other, or both.
| Single closing (one-time close) | Two closings | |
|---|---|---|
| Closings | One set of documents, one set of closing costs | A construction loan, then a separate permanent loan |
| Conversion | Modification of the existing note, or new documents | The permanent loan is a new refinance transaction |
| Permanent loan classified as | Purchase or limited cash-out, set at the first closing | Limited cash-out refinance or cash-out refinance |
| Re-qualification | Only if documents age out or terms move beyond tolerance | Full underwriting again at the second closing |
| Rate risk | Locked early; some lenders offer a float-down | You take the market rate that exists when the house is finished |
| Flexibility | Limited: only certain terms may change | High: any structure that qualifies on its own |
| Usually chosen when | You want certainty and one bill of costs | Rates are expected to fall, or the file will change materially |
How the loan-to-value is computed
This is where builders and borrowers most often talk past each other, because the base value depends on whether you already own the land.
- Purchase — buying the lot and building with the same loan. The ratio is the loan amount divided by the lesser of the purchase price (construction cost plus the lot price) or the “as completed” appraised value.
- Limited cash-out refinance — you already hold title to the lot. The ratio is the loan amount divided by the “as completed” appraised value alone.
Numbers make the difference concrete. Say the lot is worth $95,000, the fixed-price build contract is $355,000, and the appraiser values the finished house at $470,000 as completed. If you buy lot and build together, the base is the lesser of $450,000 of cost and $470,000 of value, so a $360,000 loan is 80% LTV. If you already owned the lot, the base is $470,000 and the same $360,000 loan sits at about 76.6% — a real difference in pricing and mortgage insurance. At an illustrative 6%, our payment table for a $350,000 loan at 6% shows the order of magnitude of the permanent payment that follows.
Two-closing transactions are underwritten to the refinance grids instead: the permanent loan is treated as a limited cash-out or a cash-out refinance and takes the corresponding maximum ratios. If it is a cash-out — for example, you want to reimburse yourself for cash spent on the build — the borrower must have held legal title to the lot for at least six months before the permanent loan closes.
The clock, and what may still change
Single-closing transactions run on a hard schedule: no single construction period may exceed 12 months, and the total may not exceed 18 months. Lenders structure that as three six-month periods, a twelve plus a six, or six three-month periods. Weather, permits and a subcontractor who disappears all live inside that budget, which is why a nine-month build schedule and an eighteen-month ceiling are not the comfortable margin they look like.
At or before conversion, only a defined list of terms may be modified: the interest rate, the loan amount, the loan term, and the amortization type — and that last one only in the direction of a fixed rate. Anything else has to be done as a two-closing transaction instead. Documents age too: income, employment and credit report documents must generally be no more than four months old at conversion, unless the original closing was at 95% LTV or less with an Approve/Eligible from the automated underwriting system. A borrower who quits a job in month ten discovers all of this at once — see changing jobs before closing.
Money mechanics during the build
Agency rules govern eligibility, not day-to-day administration, so the draw process is lender practice and varies. What is common:
- Interest-only on the drawn balance. You pay on what has actually been disbursed, so payments start small and rise as the house goes up. Some lenders fund an interest reserve inside the loan instead.
- Draws against inspections. Four to eight disbursements, each released after an inspector confirms the completed stage, often with title updates to keep mechanic’s liens from jumping ahead.
- A builder approval package. License, insurance, financials, references and completed projects. Owner-builders are frequently declined outright.
- A contingency line. Commonly 5% to 10% of the hard-cost budget, held for the overruns that arrive with the foundation.
- Change orders in writing. Upgrades chosen mid-build are not automatically financed; they are re-priced, re-approved, or paid in cash.
What actually breaks these files
Three failure modes account for most of the trouble. The appraisal comes in below cost, which converts the gap into cash you must bring, because the ratio is computed on the lesser figure. The build runs past the ceiling, forcing an extension, a re-lock or a two-closing rescue. Or the borrower’s file drifts — a new car loan, a shrinking bonus, a credit score that slipped — and the conversion re-verification catches it. Keeping reserves untouched through the build is the cheapest insurance available; our guide to mortgage reserves explains how lenders count them.
If what you want is an existing house plus a renovation rather than a new build, that is a different and usually simpler product — see renovation loans. The rest of the conventional requirements are on the conventional loan hub. Claude Loan is an information site, not a lender, broker or builder: your own lender’s overlays and your state’s construction lien rules decide what your file can do.
Frequently asked questions
Do I make payments while the house is being built?
Usually yes — interest on the amount drawn so far, which grows with each disbursement. Some lenders instead build an interest reserve into the loan so no payment is due until conversion, but that money is borrowed and it reduces what is left for construction. If you are also paying rent, budget for both at the same time.
Can I lock my rate before construction starts?
With a single closing the rate is set at the initial closing, and lenders offering extended locks for construction sometimes include a one-time float-down if rates fall before conversion. With two closings there is no lock on the permanent loan until you apply for it, which is the structural trade: flexibility in exchange for market risk. Our guide to rate locks covers extension costs.
Can I act as my own general contractor?
Rarely on conventional construction-to-permanent financing. Most lenders require a licensed, insured, approved general contractor, and owner-builder arrangements are treated as a materially higher risk. Some portfolio lenders allow it with substantially more equity and documented experience.
What happens if the finished house appraises for less than it cost to build?
The loan-to-value on a purchase transaction is computed on the lesser of cost or as-completed value, so the shortfall shows up as cash you must supply — or as a smaller loan. This is the main reason lenders scrutinize the appraiser’s support for custom finishes, which frequently do not return their cost in a neighborhood of comparable sales.
Your state: conventional loans and mortgage law
The federal rules above apply everywhere; the rest depends on where the home is. For each state, one page gives the 2026 conforming limit of every county and the monthly cost of a conventional loan on the state median; the other gives the state layer: who closes the loan, recording taxes, prepayment, licensing, first-time buyer programs, hard money rules and foreclosure.
Sources
Related: Renovation loans: HomeStyle, CHOICERenovation and FHA 203(k) compared, Mortgage rate locks: how long to lock, what extensions cost, when to float, Buying new construction: builder incentives, preferred lenders and the punch list, Hard money for new construction: ground-up loans, draws and the exit. Hub: Conventional loan.