What Is a Construction-to-Permanent Loan?
A construction-to-permanent (CTP) loan is a single financing product that covers both the construction of a new home and the long-term mortgage that follows. During the build phase, funds are disbursed incrementally to the builder through a draw schedule. Once construction is complete, the loan converts — or “rolls over” — into a standard permanent mortgage without requiring a second closing. This structure is also referred to as a single-close construction loan or a one-time-close (OTC) loan. The primary alternative is a two-close arrangement, where a borrower obtains a standalone construction loan and then refinances into a separate fixed-rate or adjustable-rate permanent mortgage at completion.
Single-Close vs. Two-Close Construction Financing
The defining distinction in construction lending is how many loan closings are involved. A single-close CTP loan locks in both the construction financing and permanent mortgage terms at the initial closing. The borrower pays one set of closing costs, and the permanent rate and term are agreed upon upfront. A two-close arrangement separates the transactions: the borrower first closes on a short-term construction loan (typically 6-18 months), then closes again on a permanent mortgage once the certificate of occupancy is issued. Two-close structures may offer more flexibility in shopping for permanent rates closer to completion, but they carry the risk of rate movement and require the borrower to qualify twice. Single-close loans reduce uncertainty and total closing costs, which is why most borrowers building a primary residence prefer this path. Lenders offering CTP products include conventional, FHA, and VA program options.
How the Construction Phase Works
During the build phase — typically 6 to 12 months — the lender does not disburse the full loan amount at once. Instead, funds are released in a series of draws tied to construction milestones. A typical draw schedule includes stages such as foundation completion, framing, rough mechanical (plumbing, electrical, HVAC), drywall, and final completion. Before each draw, the lender orders an inspection to verify the work matches the approved plans and specifications. During this phase, the borrower generally makes interest-only payments on the amount drawn to date, not on the full loan balance. For example, if $80,000 has been disbursed on a $350,000 construction loan, the monthly interest-only payment applies only to the $80,000. Some programs allow borrowers to defer interest payments during construction by adding them to the loan balance, though this increases total cost. The builder must typically be an approved, licensed general contractor — owner-builder arrangements are rarely permitted under CTP programs.
Conversion to Permanent Mortgage
Once construction is complete and the home receives a certificate of occupancy, the loan automatically converts to its permanent phase. No new application, appraisal, or closing is required in a single-close structure. The permanent phase operates identically to any standard mortgage: the borrower begins making full principal-and-interest payments on the total loan amount at the rate locked at closing. The permanent term is typically 15 or 30 years. Borrowers should confirm whether the permanent rate was locked at the initial close (a “lock at close” or “float-down” option) or whether it adjusts based on market conditions at conversion. Lock periods for construction loans are longer than typical purchase locks — often 9 to 12 months — which may carry a price premium reflected in the rate. The permanent phase follows the same servicing rules as any conventional or government-backed mortgage, including escrow requirements and mortgage insurance obligations if applicable.
Qualification Requirements and Builder Approval
Qualifying for a CTP loan involves all standard mortgage underwriting criteria — income verification, credit evaluation, and down payment — plus construction-specific requirements. Lenders typically require a minimum credit score of 680 for conventional CTP products, though FHA one-time-close programs may accept scores as low as 620. Debt-to-income ratios generally must not exceed 43-45%. Beyond borrower qualification, the builder must be approved by the lender. This means the general contractor must provide proof of licensing, insurance (general liability and builder risk), financial statements, and a track record of completed projects. The borrower must also submit detailed construction plans and specifications, a comprehensive cost breakdown (line-item budget), a build timeline, and a lot purchase agreement or proof of lot ownership. An as-completed appraisal is ordered based on the plans and comparable properties to establish the future home value. The loan-to-value ratio is calculated against this appraised value. For more on the full process, see new construction mortgage process.
Down Payment, Rates, and Program Options
Down payment requirements for CTP loans vary by program. Conventional single-close products typically require 5-20% down, with private mortgage insurance required below 20%. FHA one-time-close construction loans allow down payments as low as 3.5%, making them accessible for borrowers with moderate savings. VA construction loans may offer zero-down financing for eligible veterans, though fewer lenders offer VA CTP products. USDA construction loans exist in limited form for eligible rural properties. Interest rates on CTP loans are generally 0.25-0.75% higher than standard purchase mortgage rates, reflecting the additional risk and administrative complexity of construction lending. Borrowers building custom homes above conforming loan limits may need a jumbo construction loan, which carries stricter qualification standards and higher rates. When comparing loan structures, consider the total cost — including closing costs, rate premiums, and interest during construction — rather than the permanent rate alone. For guidance on evaluating program fit, see how to choose the right loan program.