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While each lender’s Construction-to-Permanent Mortgage Loan process may vary, most follow these basic steps. A Construction-to-Permanent Mortgage Loan typically includes two separate loans, the first is the interim construction loan which allows for installments known as draws to pay for building expenses during construction. Often, interest-only monthly payments are made on the interim construction loan for a period of 12-24 months. Once your home is completed, a permanent loan (mortgage) will be made to pay off the interim loan, with monthly payments for a period up to 30 years.

The first step in building your custom home is to meet with a Mortgage Loan Originator to determine how much you can borrow for your construction project. Lenders will ask that you pre-qualify for your permanent mortgage before the interim construction loan is considered. To pre-qualify, you must demonstrate that your income will cover loan payments, closing costs, and other loan expenses. In addition, lenders will consider any existing debts you may owe and your down payment amount. Eligibility and requirements will be based largely upon financial and credit history. Based on your individual situation, your Mortgage Loan Originator will explain your available options.

To pre-qualify for a loan amount and purchase price, a lender will typically ask you to provide a completed mortgage application and W-2(s) for the last two tax years, recent pay stubs covering the past 30 days, tax returns (both personal and business) for the most recent two years, most recent bank and investment statements, and show funds are available for closing costs and down payment. Finally, a lender will request a credit report to help determine a maximum loan amount. Additional information may be required, but the items listed above will usually provide a strong indication to the lender of what you can afford to borrow. When all of this paperwork has been completed, a lender will give a “good faith estimate” and a fees worksheet showing construction loan and permanent mortgage costs, based upon that loan amount.

Finding your perfect homesite is exciting but there are a few things to remember when selecting or preparing your land to build on. This includes: site preparation, including tree removal, cannot begin before closing on the interim construction loan, proof of builders’ risk insurance must be provided before closing on the interim construction loan, all utilities, wells and septic tanks must be located within the legal description you are building upon, other homes located on the property must be removed during the term of your initial construction loan, and if the lot is being surveyed from a farm or larger acreage the steps required to get the new legal description approved by the county can take several weeks.

Now the fun begins! It’s important to choose or create a floor plan that will meet or exceed your current and future needs, as changes during construction can result in costly change orders. A reputable contractor, like Winstar Builders, will provide you with all of the associated costs of building your new custom home and will ensure all expenses are included in your total construction cost. Once your house plans and specifications are finalized and your building site has been secured, your lender will order an appraisal to determine the market value of your home. 

A lender will often require the following information to complete the appraisal: all house plans and specifications, a formal bid from your builder, and a purchase agreement or deed for the land you plan to build on. The appraiser will visit your homesite and use comparable sales information to determine the fair market value of your home. This value will help set the limits for your interim construction and permanent mortgage loans. When the appraisal is completed and final costs are determined, your lender will order the title work and approve your interim construction loan. After closing, construction will begin on your new custom home!

Once your house plans and build contract have been reviewed and financing is secured, construction will begin on your new custom home! As key construction stages are completed and inspected, funds will be disbursed in a series of installments (draw schedule) detailed in your Construction Loan Agreement. Depending on the options your lender offers, if there is a previous loan on your homesite, it will be paid off at this time and combined into your interim construction loan and subsequent mortgage. Often, lenders write construction loans for a period of 12-24 months. During that time or until your home is completed, a lender may require you to make interest-only monthly payments on the amount of the construction loan you have secured, due at the first of each month.

Depending on your lender and Construction Loan Agreement, your lender may choose to perform on-site inspections during the building process. These inspections are for the lender’s internal purposes and are in addition to building code inspections. As each construction stage is completed, funds will be disbursed to your builder according to the draw schedule. After each draw request is complete, a lender will normally provide you with an updated statement showing the total draws to date, along with the remaining loan funds available for construction.

When financing the construction of your custom home, most lenders will require they be notified prior to making any changes to the original house plans and specifications, as they could affect the home’s appraised value. If you would like to make changes after construction has started, Winstar Builders will accommodate your requests by providing you with an updated quote and all necessary documents your lender might need. Please note, changes made after construction has started may incur unexpected costs such as an updated appraisal in addition to the costs of the changes.

You’re almost done, your new custom home is complete! All of the remaining costs and expenses have been calculated, a final inspection and Welcome Home meeting has taken place, and the final draw request has been paid. Depending on your lender, interest rates may be locked in up to 30 days before your home is completed, however it must include the final loan amount and final bill from your builder. It is good practice to contact your lender near your home’s completion to discuss timing and rate lock options. Lenders typically will offer a rate lock with a 60-day expiration or similar. 

When meeting with your lender to discuss locking in the permanent mortgage rate, your lender will often update your income information, request new bank or investment statements, and order a new credit report to review current debts. Saving your paystubs, banking, and investment statements in one place during the construction loan process will make these easier to find when the final permanent loan information is being compiled.

When your home is completed, your lender will need approximately 14-30 days to update your file and close the permanent financing. During this time, an appraiser will reassess your home’s value. In addition, any final inspections required for financing will be performed. Lenders and title companies may require a final survey be completed, showing that your home was built inside the legal description. Also, the necessary title work will be updated to show there have been no liens filed against the property since construction began. 

Your Mortgage Loan Officer will then submit your permanent financing application, the appraiser’s final inspection report, final survey, and photographs to underwriting for final loan approval. Most lenders perform underwriting in-house which may expedite the process. Once underwriting gives final approval, you will complete the conversion from interim construction loan to permanent mortgage at closing.

Your permanent loan is now approved and a time/date has been set for signing your permanent mortgage documents. At signing, your interim construction loan will be paid off with the permanent mortgage. Commonly, the title company will finalize this portion of the process by providing the necessary title coverage required for your lender to sell the loan on the secondary market, assuring you the best loan rate. Your Mortgage Loan Officer will then provide you a settlement statement from the title company which contains all of the financial details of the permanent mortgage closing. Congratulations, the conversion from construction loan to permanent mortgage process is complete, for you and your family to enjoy your new custom home for years to come!

We have great recommendations if you might not have a lender in mind already. Our Preferred Lenders are ready and willing to discuss your Construction-to-Permanent Mortgage loan options, the benefits they offer, and guide you through the financing process from start to finish. Some financing options may include: construction loan and lot combined mortgage, flexible down payment options, fixed or adjustable rate options, existing land loan initial repayment, interest-only payments during the construction phase, one application and one closing, locked-in interest rate, one-time documentation, not ready to build lot loans for future home construction, and more.

Just like a VA Loan, a VA Construction Loan is available for eligible service members or veterans to purchase land and build a single family home. A VA Construction Loan has many advantages such as zero down payment, no maximum loan amount, better terms and interest rates compared to conventional loans, typically lower closing costs, no mortgage insurance requirement, and more. We have great recommendations if you might not have a lender in mind already. Our Preferred Lenders are ready and willing to discuss your VA Construction Loan options, the benefits they offer, and guide you through the financing process from start to finish.