What Is a Construction To Permanent Loan?

When you build your own home or make home improvements and renovations, you may need a home construction loan to pay for everything. Many home construction lenders
require a customer to have a standard mortgage loan ready to pay the principal of the construction loan before they will approve any transfer of money.

The reason is simple. A construction loan is a short duration, interest-only loan. During the 12 to 18 month life of the loan, you are usually only required to pay the interest due on disbursed funds. The principal of the construction loan is due at the end of the loan period or at the end of construction, whichever comes first.

By requiring a customer to have a standard mortgage loan, the lender is making sure that you can pay off the construction loan on time. You then have the long-term mortgage to pay off. The complication is that the mortgage is a separate loan, requiring a separate round of applications, approvals, and closing costs. A second round of closing costs means a second helping of loan origination fees, title insurance, lender fees, closing agent fees, insurance, and recording fees. Some home construction lenders offer construction to permanent loans.

Basically, it is a package deal: a construction loan bundled with a mortgage all covered by one set of loan documents. The advantage of this type of loan is simplicity. One set of paperwork, one set of applications and only one set of closing costs. The downside is lack of flexibility.

Generally, a construction loan lender will not be able to offer the same range of mortgage options that are available if you shop for a mortgage separately. If the short-term savings and convenience of the construction to permanent loan are appealing, then this type of loan is right for you. On the other hand, if you can get better interest and repayment terms with a separate mortgage, the extra legwork might outweigh the short-term benefits of a construction to permanent loan.