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Step 3 · Budgeting

Construction-to-permanent loans

4 min read
The short answer

A construction-to-permanent loan finances building a home and then converts into a regular mortgage when construction ends, with one application and one closing. During construction you usually pay interest only on the money drawn so far. They’re available as conventional, FHA, VA and sometimes USDA loans, and require approved plans, a qualified builder and a detailed budget.

How it works

  1. Approval: the lender reviews you, the builder, the plans and the budget. The appraiser estimates the value of the finished home.
  2. Closing: one closing covers both phases; the land can be part of the loan or count toward your down payment if you already own it.
  3. Construction: funds are released in draws as stages are completed and inspected. You pay interest on what’s been drawn.
  4. Conversion: when the home is finished, the loan becomes a standard mortgage with principal and interest payments.

One-time vs. two-time close

  • One-time close (construction-to-permanent): one set of closing costs; the permanent rate is often set at the start.
  • Two-time close: a short construction loan, then a separate mortgage; two closings, but you can shop the final mortgage when the house is done.

Requirements

  • Down payment: often 5% to 20% conventional, 3.5% FHA, 0% VA with eligibility.
  • A licensed builder the lender approves, with a fixed-price contract.
  • A contingency reserve for overruns.
  • Good credit and reserves, since construction loans carry more risk.
Try it: Mortgage payment calculatorEstimate the permanent payment on the finished home to make sure the project fits your budget.

Risks to plan for

  • Cost overruns and delays: keep extra cash beyond the contingency.
  • Rate changes: if the permanent rate isn’t locked, payments could be higher at conversion; test with the rate sensitivity tool.
  • Paying rent and construction interest at the same time while you build.
  • Appraisal: if the finished home appraises below cost, you may need more cash.

If a new home from a production builder fits your needs, it’s usually simpler; see new construction vs. existing.

Common questions

How does a construction loan pay the builder?

In draws, released as construction stages are completed and inspected.

What do I pay during construction?

Usually interest only on the amount drawn so far.

Can I use land I own as my down payment?

Often yes; equity in land you own can count toward the down payment.

Updated October 2026. Educational content. OfferBacked is not currently a lender and doesn’t issue pre-approvals or loans.