27th Jun 2026
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A construction-to-permanent loan combines the financing for building your home and the long-term mortgage into a single loan with one closing. You apply once, close once, and pay one set of closing costs. When construction ends, the loan converts automatically to a permanent mortgage, no reapplication, no second round of underwriting, no additional fees.
If you're planning to build a custom home and want to understand how this financing works before you talk to a lender, this guide covers everything: how the loan is structured, what the draw process looks like, how it compares to a construction-only loan, what you need to qualify, and what it realistically costs.
If you're planning to build a custom home and want to understand how this financing works before you talk to a lender, knowing exactly how construction loans work can be quite helpful.
What Is a Construction-to-Permanent Loan?
A construction-to-permanent loan is a single financing product that covers both the home-building phase and the long-term mortgage. It closes once, with one set of closing costs. During construction, the borrower makes interest-only payments on funds drawn. When the builder receives a certificate of occupancy, the loan converts automatically to a standard amortizing mortgage. The permanent interest rate is locked at the original closing, before construction begins.
The core appeal of this structure is simplicity. Building a custom home already involves enough moving parts, permits, contractors, inspections, timelines, and weather delays. The last thing most borrowers want is to manage two separate loan applications simultaneously.
With a construction-only loan (the alternative), you borrow for the build, then apply for a new mortgage once the home is complete. That means two applications, two closings, two rounds of closing costs, and, critically, the risk that your financial situation or the rate environment has changed by the time you need permanent financing. If rates rise 1.5% during your build, you absorb that increase entirely. If your income shifts or your credit score drops, you may face a harder approval the second time around.
A construction-to-permanent loan, also called a one-time close construction loan, eliminates all of that. Your rate locks before the foundation is poured. Your approval is done. Your permanent mortgage is already set up and waiting for the day your builder hands you the keys.
How the Loan Works: Phase by Phase
A construction-to-permanent loan operates in two phases. During the construction phase, lasting 12 to 18 months, funds are disbursed in stages called draws as verified milestones are completed, and the borrower pays interest only on amounts drawn. Once the certificate of occupancy is issued, the loan converts automatically to the permanent phase, where standard principal-and-interest payments begin on the full loan amount.
The Construction Phase
Once you close, your builder pulls permits, and construction begins. Funds are not released all at once. Instead, the lender disburses money in stages, called draws, as each construction milestone is completed and independently inspected. A typical build involves five to six draws, timed to milestones like foundation completion, framing, mechanical rough-in, drywall, and final finishes.
You pay interest only on the amounts actually drawn, not on your total approved loan amount. If your loan is $480,000 and you've drawn $140,000 through framing, your monthly payment is calculated on $140,000. That payment grows incrementally as each subsequent draw is released. For most borrowers, managing existing housing costs during the build—to—mortgage or rent payment elsewhere, this structure keeps construction-phase costs manageable.
The construction phase typically runs 12 to 18 months, according to current lender guidelines. Typical construction-to-permanent loan terms include a 12–18 month construction period followed by a 15–30 year permanent mortgage. In Michigan, where harsh winters can push construction timelines, many lenders build in extension provisions when weather-related delays push completion past the original target date.
The Conversion
When your builder receives the certificate of occupancy from your local municipality, the construction phase ends and the permanent phase begins automatically. No new paperwork. No re-underwriting. No second closing.
Your loan converts to a standard amortizing mortgage, the same structure as any conventional home loan, at the rate you locked when you originally closed. Your first full principal-and-interest payment is due approximately 30 days after conversion.
That rate lock is one of the most valuable features of the structure. One-time close loans lock your permanent rate before construction begins, which means you're fully insulated from rate increases during the build period. In a market where rates can move significantly over a 12-month window, that certainty has real financial value.
Construction-to-Permanent vs. Construction-Only: What's the Actual Difference?
| Feature | Construction-to-permanent | Construction-only |
| Number of closings | One | Two |
| Closing costs | Paid once | Paid twice |
| Permanent rate | Locked at original closing | Set at second closing — market-dependent |
| Qualification risk | One-time only | Must requalify after build |
| Best for | Most custom home buyers | Borrowers with specific end-financing plans |
The construction-only path does have one genuine advantage: flexibility. If you have reason to believe rates will fall significantly during your build, or if you've secured a specialised end-loan commitment from another source, taking a construction-only loan keeps your permanent financing options open. For most borrowers, though, that flexibility isn't worth the added cost, complexity, and risk of a second closing. A construction-to-permanent loan could be a smart option if you're looking for the convenience and cost savings of a single-close home loan.
What You Need to Qualify
Most construction lenders require a minimum credit score of 680 for conventional programs, with the best rates available at 720 and above. FHA construction-to-permanent loans accept scores as low as 580, though most lenders impose overlays requiring 620 to 640. At Sistar Mortgage, we work with borrowers across this range and will identify which program — conventional, FHA, or VA — fits your profile before you invest time in a full application.
Most borrowers should realistically expect to put down 15 to 25 percent for a construction loan, depending on their credit score, income, and project complexity. FHA construction-to-permanent loans reduce this to 3.5% for eligible borrowers. VA-eligible veterans may access construction-to-permanent financing with no down payment at all — one of the most underutilised advantages in the VA loan program.
If you already own your land outright, that equity typically counts toward your down payment requirement. On a $500,000 project where you own land valued at $100,000, your required cash contribution changes significantly. It's the first question we ask every borrower who comes to us with a build in mind.
For construction-to-permanent loans, a DTI ratio of 43% or lower is typically required, meaning your total monthly debt payments should not exceed 43% of your gross monthly income. The nuance: lenders calculate DTI using your projected permanent mortgage payment, not just what you owe today. If you want a full walkthrough of how lenders score each of these factors together, credit, DTI, down payment, and builder credentials.
What Does a Construction-to-Permanent Loan Cost?
Construction-to-permanent loan rates are typically 0.5 to 1 percentage point above conventional mortgage rates during the construction phase. Once the loan converts, the permanent rate — which was locked at the original closing — applies for the full mortgage term. Closing costs are paid once, typically 2 to 5 percent of the loan amount. Additional costs include draw inspection fees of $100 to $200 per visit and a 5 to 10 percent contingency reserve required by most lenders.
The rate picture is important to understand clearly. During the construction phase, the rate on most construction-to-permanent loans is variable and typically runs slightly above conventional mortgage rates. The permanent rate, locked at closing, is what you'll carry for the life of your mortgage — and that's the figure that matters most to your long-term budget.
Rates are subject to change. Contact a Sistar Mortgage loan officer for current construction loan rates specific to your loan type and profile.
Here's what to build into your cost estimate beyond the interest rate:
- Origination fees: Typically 0.5–1% of the total loan amount
- Draw inspection fees: $100–$200 per inspection visit; a five-draw build runs $500–$1,000 total
- Closing costs: 2–5% of the loan amount, paid once at the original closing — a direct saving versus the construction-only path, which requires closing costs at both transactions
- Contingency reserve: Most lenders require 5–10% of the total build budget held in reserve for cost overruns; some lenders build this into the loan, others require it as a cash reserve
The contingency is worth taking seriously. Construction costs in Southeast Michigan have tracked above national averages in recent years, according to the National Association of Home Builders. A 10% contingency on a $450,000 build is $45,000. Borrowers who skip it and then face unexpected structural costs mid-build have limited options, and none of them are cheap.
How to Get a Construction-to-Permanent Loan With Sistar Mortgage
Building is a long process. The financing part of it doesn't need to be.
Most borrowers who come to us have spent weeks researching construction loans online and still feel uncertain about their specific situation, what they'll qualify for, how their land equity factors in, and whether a conventional or FHA structure makes more sense for them. One conversation usually answers more of that than a month of research, because the answers depend on your specific numbers, not general guidelines.
The process at Sistar moves in a straightforward sequence: pre-qualification, builder selection and documentation, the as-completed appraisal, closing, and then a steady draw cycle managed by our team through to the certificate of occupancy. We coordinate directly with your builder and inspector across Macomb, Oakland, Wayne, and surrounding Michigan counties — and we're licensed in 41 states, so if your build is elsewhere, we can still handle it.
If you're at the stage of comparing lenders, the right question to ask every one of them is: Do you hold delegated approval authority for conventional, FHA, and VA construction loans, or do you send them to a third-party underwriter? In-house approval means faster draws, faster decisions on change orders, and a single point of contact through the entire build.
Frequently Asked Questions
What is the difference between a construction-to-permanent loan and a construction-only loan?
A construction-to-permanent loan combines the build-to-suit financing and the permanent mortgage into one loan with a single closing. A construction-only loan covers only the building phase; when construction ends, you must apply for and close on a separate permanent mortgage. The one-time-close structure saves you a second set of closing costs and eliminates the risk of needing to requalify for permanent financing after the build.
Can I lock my interest rate before construction begins?
Yes, this is one of the primary advantages of a construction-to-permanent loan. Your permanent mortgage rate locks at the original closing, before a single permit is pulled. That rate applies for the full term of your mortgage regardless of what rates do during the construction period.
How long does the construction phase last?
Most construction-to-permanent loans allow 12 to 18 months for the construction phase. In Michigan, where winter weather can compress active building seasons, many lenders build in extension provisions. If your build runs past the original completion date, contact your loan officer before the deadline rather than after; extensions are typically available but need to be requested proactively.
What credit score do I need for a one-time close construction loan?
Conventional construction-to-permanent loans generally require a minimum score of 680, with better rates available at 720 and above. FHA one-time-close programs accept scores as low as 580 with a 3.5% down payment; most lenders apply overlays requiring 620 to 640. Sistar works with borrowers across this range to identify the right program structure.
Does owning land help me qualify?
Yes, meaningfully. If you own your land free and clear, its appraised value typically counts toward your down payment requirement. On a $500,000 construction project where you own land worth $90,000, your required cash contribution is reduced dollar for dollar. This is one of the most overlooked advantages for borrowers who purchased land before starting the construction planning process.
What happens if construction costs more than the loan amount?
Most lenders require a 5–10% contingency reserve built into the loan budget specifically for this scenario. If costs exceed even the contingency, the borrower is typically responsible for the difference out of pocket. This is why a detailed, contractor-verified budget submitted before closing is worth the effort — it's the best protection against a funding gap mid-build.
