Construction-to-Permanent Loans: How One-Time-Close Works, Lender Overlays, and Draw Management

Construction-to-permanent loans finance the build and roll into the permanent mortgage at completion without a second closing. The single closing eliminates double closing costs and rate risk between phases, but underwriting is more complex than a standard purchase and the lender pool is narrow.

One-Time-Close vs. Two-Time-Close

A one-time-close (OTC) loan locks the permanent rate at the construction loan closing. The borrower qualifies once, pays one set of closing costs, and does not need to requalify when construction completes. A two-time-close involves a standalone construction loan that converts or refinances into a permanent mortgage at completion. OTC is simpler for the borrower but requires the lender to underwrite for both phases simultaneously. Most OTC products are FHA, VA, or USDA. Conventional OTC is less common and requires a stronger lender relationship.

Qualifying and Appraisal

• ✦The appraisal is completed on the proposed property using plans and specifications; value is based on subject-to-completion
• ✦LTV is calculated against the lesser of appraised value or total cost (land plus hard costs plus soft costs)
• ✦FHA OTC allows 96.5% LTV; VA OTC allows 100% LTV with eligible entitlement; conventional OTC typically caps at 90-95% LTV
• ✦Borrower income is underwritten to the permanent loan payment, not the interest-only construction payment

Draw Management and Builder Approval

During the construction phase, funds are disbursed in draws based on construction progress inspections. Most lenders require four to six inspection-triggered draw requests. The lender or an assigned draw service sends an inspector before releasing each draw. Builders must typically be approved by the lender before the loan is originated. Builder approval requires proof of license, insurance, and often a review of prior completed projects. Custom builders who have not worked with the lender before add underwriting time and approval risk.

Common Lender Overlays

• ✦Minimum FICO 680 for most OTC programs despite FHA allowing 580
• ✦Builder must be licensed and insured with minimum general liability coverage
• ✦Maximum construction period 12 months from first draw
• ✦Borrower may not serve as owner-builder under most programs
• ✦Interest reserve may be required to cover construction-phase interest payments