Construction-to-Permanent Loans: Build and Finance Your Dream Home
A Construction-to-Permanent Loan (also called a "Construction-to-Perm" loan) is a mortgage solution that allows you to finance the construction of a new home and automatically convert it into a permanent mortgage once the construction is complete. This type of loan is ideal for those building a new home, as it streamlines the financing process by covering both construction costs and long-term home financing in a single loan package.
How Construction-to-Perm Loans Work
With a Construction-to-Perm Loan, the financing process involves two main stages:
- Construction Phase: During this phase, funds are disbursed in stages to cover the cost of construction as work progresses. Interest-only payments are typically required during this time, which helps keep costs manageable.
- Permanent Mortgage: Once construction is completed and a certificate of occupancy is issued, the loan automatically converts into a standard mortgage. This saves borrowers from needing to secure separate financing or go through an additional closing process.
Borrowers benefit from the stability of having a permanent mortgage rate locked in at the beginning of the project, protecting against potential interest rate increases over time.
Benefits of Construction-to-Permanent Loans
- Streamlined Process: Financing is simplified with one closing and one set of closing costs, which means fewer fees and less paperwork for borrowers.
- Fixed or Adjustable Rate Options: You can choose either a fixed or adjustable interest rate for the permanent phase, depending on your financial goals and market trends.
- Interest-Only Payments During Construction: Many lenders offer interest-only payments during construction, which helps reduce monthly costs until the home is ready to move into.
- Locked-In Rates: Borrowers benefit from locking in an interest rate upfront, protecting them from market rate fluctuations while the home is being built.
Eligibility and Requirements
Construction-to-Perm Loans generally require:
- Good Credit: A higher credit score is usually needed for approval, often in the range of 680 or above.
- Down Payment: A down payment of 10-20% is typically required, though this may vary by lender.
- Detailed Construction Plans: Lenders often request construction plans, budgets, and timelines to ensure the project is well-planned.
- Income Verification: Borrowers need to show proof of steady income and meet debt-to-income (DTI) requirements.
Is a Construction-to-Perm Loan Right for You?
Construction-to-Perm Loans are ideal if you’re looking to build your home from scratch and want a seamless financing solution. By covering both the construction and permanent phases of financing, you can enjoy a streamlined process and the peace of mind that comes with locked-in terms. Contact us today to learn more and see if a Construction-to-Perm Loan aligns with your home-building goals!