Talking about a Construction to Permanent Mortgage


Are you planning a major home renovation project or new home construction on land you own or want to buy? There are special considerations when it comes to the construction financing.

A Construction-to-Permanent Mortgage may be the right fit for you. With this complete “one time close” loan package you can even finance the land purchase before building your new home. If you already own the property a no-down-payment option lets you use the equity towards the equity in the entire transaction.

Here are some of the construction-to-permanent benefits:

  • One closing for the construction & permanent mortgage
  • Interest only payments during the construction phase
  • Convenient approval process and lower closing costs
  • A locked-in rate on both construction & permanent loan
  • No prepayment penalties and flexible funding options

How Can I secure a Construction-to-Permanent Mortgage?

The First Step should be to talk to a loan officer that has experience with construction loans.  The amount you may borrow will be an important part of your discussions with your builder in deciding a budget and what to include in your new home construction or renovation project. A preliminary discussion with a construction loan specialist will help you understand the loan structure & the overall process from application to when the construction is finished.

To get qualified for the financing, you will need to provide basic debt, income and asset information. Your construction lender will explain what documents will be needed.

To start the loan application you will need a signed construction or purchase contract with your builder. The contract will detail certain aspects that will impact your loan, such as contract amount, building specifications & plans, a break-down of construction costs, construction start all completion dates.

 How does a construction-to-permanent mortgage work?

 A Construction-to-Permanent loan involves only one application and one closing that covers the construction phase and the permanent mortgage.

  • The construction phase of the loan has interest-only payments. The bank will set up a disbursement schedule which are the payments made to your builder as the work gets completed.
  • An initial loan disbursement is made if you’re purchasing real estate property on which to build.
  • If you already have a loan on the property that you’re building on, the first disbursement of the construction loan will pay-off that loan before construction starts.
  • Conversion to a 30 year fixed-rate mortgage after the construction phase is complete.

 Selling my current home to finance my new construction

You may plan to use the proceeds from the sale of your current home to help finance the construction of your new home. Construction loans are structured to meet your specific needs. Your construction loan specialist can help you understand your best options.

Making the transition financially and physically into a new home can require some juggling. Most people will take one of two approaches when it comes to moving from their current house to their newly built home:

Wait to sell

You may want to wait to sell your current home until you can move into your new home. To do so, you’ll have to qualify for a new construction loan while still making payments on your existing home mortgage. Additional cash reserve requirements may also be needed. If you already own the property where you’re building, that can be used as equity for your new construction loan.

Sell now and rent

Selling your current home before construction begins and living in a rental or other housing alternative until your new home is ready is another option. This makes the equity in your current home available for immediate use for your new construction and you’ll only have the construction loan outstanding.

Talk to your lender early on about what choice is right for you.

How do I get ready for my mortgage application?

It’s a good idea to get your financial house in order before you apply for your mortgage. This can make the application process easier and help ensure that you qualify for the mortgage loan you want. If you’re planning a joint application, make sure you are both prepared.

Three to six months before your mortgage application:

  • Get Your Credit Report: Request a free copy of your credit report from all three major consumer reporting companies and read them carefully. Notify the companies of inaccuracies that may negatively affect your credit score.
  • Don’t make any major purchases: Hold off on making any big purchases, such as a car or furniture, until after your closing. Taking on significant new debt now can impact your mortgage loan decision and how much you can borrow.
  • Start saving your pay stubs and other documentation: Ask for a Document Checklist and talk through any details you may be unsure about with your construction loan specialist.

Building a new home or renovating an existing one is a complex process. A Construction to Permanent mortgage makes the financing simple. The borrower can focus on their project with peace of mind knowing both the construction financing and the permanent mortgage are approved, the rate is set and the details for financing each stage from start to finish has been worked out ahead of time.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and enjoys working works with homeowners and builders on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.