Construction & Renovation
Construction to Permanent Loans Explained
How a construction to permanent loan works: the build phase, interest only draw payments, inspections and the conversion to a standard mortgage at completion.
Updated 2026-08-21| Applies to: Buyers building a new home on their own lot or with a builder, rather than buying a completed house.
The short answer
A construction to permanent loan finances the build and then becomes your long term mortgage without a second closing. During construction the lender releases funds to the builder in draws as work is completed and inspected, and you pay interest only on the balance drawn. When the home is finished and the certificate of occupancy is issued, the loan converts to a fully amortizing mortgage with regular principal and interest payments.
Building a home changes the financing question. There is no finished house to appraise, no seller to negotiate with, and money has to reach the builder in stages. A construction to permanent loan is designed around that reality.
The two phases
| Phase | What happens | Your payment |
|---|---|---|
| Construction | Lender funds draws to the builder as work is completed and inspected | Interest only on the amount drawn so far |
| Permanent | Loan converts at completion, usually at certificate of occupancy | Full principal and interest on the final loan amount |
What the lender reviews before closing
- A signed construction contract with a fixed or clearly defined cost
- Complete plans and specifications for the home
- A line item budget the draw schedule will follow
- The builder's license, insurance, references and financial capacity
- An appraisal based on the plans, specs and comparable finished homes
- Your credit, income and assets, exactly as with any mortgage
Why the appraisal is different
The appraiser values a home that does not exist yet, working from the plans and specifications and comparing them against completed homes nearby. If the appraised value comes in below the total project cost, you cover the gap with additional funds, adjust the scope, or restructure the deal.
How interest works during the build
Interest accrues only on funds actually disbursed. A payment early in the build, when only the foundation draw has funded, is small. By the final draws the interest only payment is much closer to a full mortgage payment. Budget for that ramp, and remember you may also be paying rent or an existing mortgage during the same months.
General education, not a commitment to lend. Construction, land and renovation program terms, loan to value limits, draw procedures and builder requirements vary by lender, property and current guidelines, and they change over time. Manny Oloyede | Mortgage Broker | NMLS 1824463 | Ultimate Mortgage Brokers LLC. Equal Housing Opportunity.
Common mistakes to avoid
- Budgeting only for the finished payment and ignoring the interest carried during construction
- Signing a builder contract with an open ended cost that the lender cannot underwrite
- Assuming the appraised value will automatically equal the contract price
- Leaving no cash cushion for change orders and allowance overages
Related loan programs
Frequently Asked Questions
People also ask
Do I make payments during construction?
On most one time close programs you pay interest only on the funds drawn to date, then the full payment begins after conversion.
Read: One Time Close Construction LoansWhich is cheaper overall?
Usually the one time close, because you pay closing costs and title work once instead of twice. The exact difference depends on loan size and the fees on each structure.
Read: One Time Close vs Two Time Close Construction LoansHow long does a draw take to fund?
Commonly a few business days from request to funding once the inspection is scheduled and lien waivers are in. Timelines are not guaranteed and depend on the inspector and title company.
Read: How Construction Loan Draws WorkHow much should my contingency be?
Many builders and lenders plan a contingency in the range of five to ten percent of hard costs. Larger custom projects and older lots with unknown site conditions justify the higher end.
Read: How to Finance a Custom Home BuildCan I use land equity as my down payment?
Often yes. Land owned free and clear commonly counts toward equity in the construction project, subject to program rules and the appraised lot value.
Read: Land Loans vs Construction LoansShould I pay cash for the lot?
If you can do it without draining the reserves the construction loan will require, paying cash simplifies the future approval and maximizes the equity credit.
Read: Buying Land Now and Building LaterTerms used in this guide
- Construction to Permanent Loan
- Financing that funds a home build in draws and then converts to a long term mortgage at completion without a second closing.
- Draw Schedule
- The stage by stage plan for releasing construction funds as work is completed and inspected, built from the project's line item budget.
- New Construction
- A home being built or recently completed, financed either with a construction loan or an end loan once the home is finished.
- Certificate of Occupancy
- The local government document confirming a newly built or renovated home meets code and is legal to occupy.
Written by
Manny Oloyede, Mortgage Broker
NMLS #1824463 | Ultimate Mortgage Brokers LLC NMLS #2619461 | Licensed in OH | KY | NC | PA | SC | TN | TX
I have worked in mortgage lending since 2018 out of the Akron / Cuyahoga Falls Branch, helping buyers, homeowners and investors across Northeast Ohio and every state where I am licensed. These guides reflect the questions I answer most often, written the way I would explain them on a call.
Keep reading
One Time Close vs Two Time Close Construction Loans
Compare one time close and two time close construction financing: closing costs, rate risk, requalification at completion and which structure fits which builder.
Construction & RenovationHow Construction Loan Draws Work
How construction draws are requested, inspected and funded, how the draw schedule is built from the budget, and what causes a draw to be delayed.
Construction & RenovationConstruction Loan Down Payment and Loan to Value
How construction lenders set the down payment using loan to value and loan to cost, how owned land counts as equity, and how occupancy changes the limits.
Construction & RenovationOne Time Close Construction Loans
How a single closing construction to permanent loan works, what builders and lenders require, and how draws, contingencies and rate locks are handled.
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