Construction-to-Permanent Loans 2026: How the Program Works and Who Offers It

A construction-to-permanent loan finances a new build and converts to a standard mortgage at completion with a single closing. The borrower pays interest only on the drawn balance during construction. After the certificate of occupancy is issued, the loan converts to the permanent product. Avoiding a second closing saves the borrower several thousand dollars in fees.

How the Draw Process Works

Funds are disbursed in draws as construction milestones are completed. A third-party inspector (sometimes called a construction manager or draw inspector) visits the site and confirms each phase before the lender releases the next draw. Typical milestones: foundation, framing, rough-in mechanical, insulation and drywall, and final. Lender reimbursement to the builder happens after each inspection.

Underwriting Requirements

• ✦Signed construction contract with licensed general contractor
• ✦Detailed project plans, specifications, and itemized budget
• ✦Appraisal of the completed property based on plans and specs (as-completed value)
• ✦Builder approval: lender will verify builder's license, insurance, and experience
• ✦Contingency reserve: most lenders require 5-10% of construction costs held in reserve
• ✦Borrower must qualify on the permanent loan terms, not just the construction phase

Agency and Non-Agency Options

• ✦Fannie Mae: offers construction-to-perm guidelines; available through select lenders
• ✦FHA: OTC (One-Time Close) program for construction-to-perm on primary residence; 3.5% down
• ✦VA: VA OTC program for eligible veterans; no down payment required on the permanent loan
• ✦USDA: single-close construction-to-perm available for rural properties
• ✦Portfolio and non-QM: available through regional banks and specialty lenders for projects that do not fit agency parameters

Borrower Risks to Communicate

Rate locks on construction-to-perm loans are more expensive than purchase locks. 12-month locks are common during construction, with extension fees if the project runs over. Cost overruns beyond the contingency reserve require additional borrower funds since the loan cannot increase after closing. If the builder goes out of business during construction, the borrower still owes the drawn balance. Title insurance and builder risk insurance are critical.