A Construction-to-Permanent loan, also called a One-Time-Close loan (OTC), is a special loan used to finance the cost of buying land, building a home on it, and later serving as the mortgage on the home once it’s finished being built. This kind of loan is ideal for borrowers who want to build a custom home from scratch on a chosen lot using contractors they pick.

Normally, you’d need two separate loans for these purposes: a construction loan to buy the land and build a home on it, and a separate mortgage loan to finance the finished home. A construction-to-permanent loan accomplishes both goals. Loan funds are used to pay for the lot and building costs and once construction is completed, the loan converts to a fixed-rate permanent mortgage loan with a term of 15 to 30 years — whichever you choose.

Eligible Property Types: 1-Unit Site-Build, Modular, and Multiwide Manufactured Home

Here’s an example of how a construction-to-permanent loan works and how it can simplify the financing process. Cory and Jennifer want to build a completely custom home on a lot for sale. They enlist the help of an architect and consult with different contractors to get an idea of how much a custom home will cost to build. Armed with an initial cost estimate, which they’ve deemed is within their budget Cory and Jennifer apply for a construction-to-permanent loan. After providing careful documentation, including confirmation that the planned home will conform with local building codes and regulations, their loan is approved. Now, they can purchase the lot and the lender will pay their contractors in stages as the project dictates without having to apply for multiple loans.

Minimum Credit Score Requirement

• FHA – 620 (Max LTV 96.5%)
• VA – 620 (Max LTV 100% not including VA Funding Fee)
• USDA – 640 (Max LTV 100% of market value)
• Conventional 680 (Max LTV 95%)

Advantages of a Construction-to-Permanent Loan

There are several upsides to a construction-to-permanent loan. For one, this kind of loan works like a line of credit in that the builders are allowed to draw exactly the amount of money they need at the time they need it. 

Another benefit is that the borrowers do not have to pay payment during the construction phase (only for FHA, VA, and USDA, NOT Conventional). Perhaps best of all, you don’t have to apply, qualify, complete paperwork, or pay closing costs for two different loans. That can save you time as well as money otherwise spent on separate application and settlement fees.

Summary

A construction-to-Permanent loan program allows the buyers to combine your construction financing and permanent mortgage into one loan. Best of all, the buyers will save time and money with just one closing and one set of closing costs. Include the purchase of your lot in the financing or build on a lot you already own. For FHA, VA, and USDA, no payment is due from borrowers during the construction phase. You’ll also benefit by being able to lock in your permanent mortgage interest rate before construction begins, giving you added protection against rising rates.

Be sure to compare a construction loan offer with other loans you might be able to get. We can help you decide if this is the best fit for your situation, give me a call or text at 425-224-5794 if you have any questions.