Build Your New Home With One Construction-to-Permanent Mortgage
Building a new home can be exciting, but financing the construction can be considerably more complicated than purchasing an existing property.
A One-Time Close Construction Loan, sometimes called a Construction-to-Permanent Loan, combines the financing for construction and the permanent mortgage into a single loan transaction.
Instead of obtaining a short-term construction loan and then applying for an entirely new mortgage when the house is completed, qualifying borrowers may be able to close once and have the construction financing convert into permanent mortgage financing after construction is finished.
At Capital Funding Mortgage, we help borrowers throughout Pennsylvania and New Jersey evaluate one-time-close construction loan programs from multiple wholesale lenders.
I’m John Madden, owner of Capital Funding Mortgage, and I have been helping borrowers with mortgage financing for more than 25 years.
Construction financing involves more moving parts than a typical home purchase, so our goal is to help you understand the financing, builder requirements, construction budget, appraisal, draw process, and permanent mortgage before construction begins.
A one-time-close construction loan combines two stages of financing:
Funds are advanced during construction as the home is being built.
After construction is completed and the applicable lender requirements are satisfied, the loan transitions into the permanent mortgage.
The major advantage is that the construction and permanent financing are established as part of a single closing.
Fannie Mae and Freddie Mac both currently recognize one-time-close construction-to-permanent structures. In a single-closing transaction, the permanent financing documents are generally executed as part of the original construction closing, with conversion occurring after the home is completed.
Construction financing can generally be structured in two ways.
The borrower closes once before construction begins.
The financing covers the construction period and then transitions into the permanent mortgage after the home is completed.
The borrower first obtains a construction loan.
After construction is completed, the borrower applies for and closes on a separate permanent mortgage.
A two-closing structure may work well in certain situations, but it can also involve:
A one-time-close loan can eliminate some of those uncertainties.
Potential advantages may include:
The exact benefits depend upon the particular lender and program.
Depending upon the program, a construction-to-permanent loan may potentially finance eligible costs associated with building the home, including:
If you already own the land, the financing can be structured differently.
For certain conventional single-closing transactions, Fannie Mae distinguishes between borrowers purchasing the lot as part of the transaction and borrowers who already own the lot before construction financing begins.
Owning the building lot can be an important advantage.
Depending upon the lender and transaction, the value or equity in land that you already own may be considered when structuring the financing.
For example, suppose you own land worth substantially more than any debt secured by it.
That equity may help satisfy part of the borrower-equity requirement, depending upon the loan program and lender guidelines.
We can review:
before determining how the transaction may be structured.
A one-time-close construction loan may also be available when the borrower needs to purchase the building lot as part of the transaction.
Depending upon the program, the financing may combine:
Land purchase + construction costs + permanent mortgage
into one overall transaction.
This can be particularly attractive to someone who has found the right property but has not yet purchased the land.
A construction appraisal is different from an appraisal of an already completed home.
The appraiser generally reviews items such as:
The appraiser then develops an opinion of the property's expected “as-completed” value.
That value becomes an important part of the lender's analysis.
The lender generally needs to determine whether the proposed home will support the requested financing once construction is finished.
Before closing, the lender will generally need detailed information about what is being built.
This may include:
The more complete the plans and specifications are, the easier it is for the lender and appraiser to understand the proposed property.
A one-time-close construction loan is not based solely upon the borrower's qualifications.
The lender will also typically review the builder or general contractor.
Depending upon the lender, the builder may need to provide information such as:
Builder requirements vary substantially between lenders.
For that reason, it is helpful to discuss financing before finalizing your builder contract whenever possible.
The lender will generally require a detailed construction budget showing how the money will be spent.
This may include:
A realistic and complete budget is extremely important.
Cost overruns can become a significant problem if they are not anticipated.
Some construction loan programs may require a contingency reserve.
This is money set aside to address unexpected construction expenses.
Building costs can change because of:
Contingency requirements vary by lender and program.
The lender generally does not give the builder the entire loan amount at closing.
Instead, construction funds are distributed through a series of draws as work is completed.
For example, draws might occur after completion of major stages such as:
The actual draw schedule depends upon the lender and construction contract.
Before releasing a construction draw, the lender may require an inspection to verify that the corresponding work has been completed.
The inspector generally confirms progress against the approved construction schedule.
This protects both the lender and borrower by helping ensure that funds are released in proportion to completed work.
Payment requirements during the construction phase depend upon the loan program.
In many construction loan structures, the borrower may make payments based upon the amount of construction funds that have actually been advanced rather than the entire final mortgage balance.
The exact calculation, interest rate, and payment requirements vary by lender.
Before closing, we will explain how your specific construction-period payments are calculated.
After the home is completed, the lender generally needs to verify that construction is complete and that the property satisfies applicable requirements.
This may involve:
For eligible one-time-close structures, the loan then converts or transitions into the permanent mortgage according to the program terms. Fannie Mae, for example, requires a completion report after construction and has specific conversion and requalification requirements for certain transactions.
This depends upon the program and what has changed during construction.
One of the advantages of a one-time-close structure is that the borrower is underwritten before construction begins.
However, lenders may still verify certain information before the loan converts to permanent financing.
Depending upon the program, requalification or updated documentation may be required if circumstances change materially, such as:
Current conventional agency guidelines contain specific rules governing when requalification and updated documentation are required.
With traditional two-close financing, the borrower may need to obtain a new mortgage after construction.
That creates additional uncertainty.
Imagine beginning a 12-month construction project expecting to obtain a permanent mortgage when the home is finished.
During construction:
With a properly structured one-time-close construction loan, much of the permanent financing is established at the beginning of the process.
That can provide additional certainty.
Rate-lock structures vary substantially among construction lenders.
Some programs may establish permanent financing terms at the initial closing, while others may provide mechanisms for modifying certain permanent loan terms when construction is completed.
Current Fannie Mae and Freddie Mac rules permit certain one-time-close transactions to modify specified permanent-loan terms under defined conditions.
We can explain exactly how the interest rate works for the particular construction program you are considering.
Construction delays happen.
Weather, permitting, material availability, labor shortages, inspections, and change orders can all affect completion dates.
Every lender establishes rules regarding the permitted construction period and extensions.
This is something borrowers should understand before closing.
The construction contract should also provide a realistic completion schedule.
There is no single down payment requirement for every one-time-close construction loan.
The amount can depend upon:
If you already own the lot and have substantial equity, your financing needs may look considerably different from those of someone purchasing both the land and construction at the same time.
Construction lenders typically look carefully at the borrower's overall financial profile.
Factors may include:
Because construction involves additional risk and complexity, lender standards can differ considerably.
Construction lenders may require borrowers to maintain reserves after closing.
This can be especially important because unexpected expenses may occur during construction.
Depending upon the program, eligible reserves may include certain:
The required amount depends upon the lender and overall transaction.
Self-employed borrowers may also qualify for construction financing.
The lender may need to review:
Because construction loans can involve longer timelines, it is particularly important to analyze self-employed income carefully before beginning the project.
Custom homes frequently require larger loan amounts.
Depending upon the lender, jumbo construction-to-permanent financing may be available for higher-priced projects.
Jumbo construction lenders may have different requirements regarding:
As a mortgage broker, we can evaluate multiple wholesale lenders when available rather than limiting the borrower to one bank's construction program.
One-time-close construction financing can be especially useful for borrowers building a custom residence.
The process may involve:
Step 1: Identify the lot
Step 2: Select the builder
Step 3: Finalize plans and specifications
Step 4: Establish the construction budget
Step 5: Complete mortgage qualification
Step 6: Obtain the “as-completed” appraisal
Step 7: Obtain lender approval of the builder and project
Step 8: Close the construction-to-permanent mortgage
Step 9: Begin construction and construction draws
Step 10: Complete the home and convert to permanent financing
Starting the financing conversation early can help identify problems before substantial money is committed to plans, land, or a builder.
Capital Funding Mortgage assists borrowers seeking construction financing throughout the areas we serve in Pennsylvania.
This may include borrowers building in:
Whether you already own land or are purchasing a building lot, we can review available construction-to-permanent financing options.
We also help borrowers evaluate new-construction financing throughout New Jersey.
Construction requirements can vary depending upon:
We recommend discussing financing before committing to a final construction contract whenever possible.
Exact requirements vary, but borrowers should generally expect documentation involving both their finances and the construction project.
Additional documentation may be required depending upon the lender and project.
This is one of the most important recommendations we can make.
If you are considering building a home, speak with us before you:
A short conversation early in the process can prevent significant problems later.
Construction lending is not a one-size-fits-all business.
Different lenders may have different requirements for:
As a mortgage broker, Capital Funding Mortgage works with multiple wholesale lenders.
That gives us the ability to evaluate available construction programs rather than directing every borrower to the same lender.
If you are considering building a home in Pennsylvania or New Jersey, contact us early in the planning process.
We can help review:
Contact John Madden at Capital Funding Mortgage to discuss One-Time Close Construction Loan options in Pennsylvania and New Jersey.
With more than 25 years of mortgage experience and access to multiple wholesale lenders, our goal is to help you understand the financing before construction begins—and provide a clear path from an empty lot to your completed home.
Capital Funding Mortgage
One closing. Construction financing. Permanent mortgage. One coordinated process.
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