Construction to permanent loans are a way for you to get the money you need to both buy the land your house will be built on and to pay for the construction of it. These loans are a good option if you have reached a point of financial stability in your life and want to save time by only having one loan vs. multiple.
Because a construction to permanent loan is a combination of mortgages, and the lender doesn’t have a house they can sell to recoup their money, construction to permanent loans are harder to get than a traditional mortgage.
Construction to permanent loans also come with higher interest rates and require larger down payments, so if you have a large debt to income ratio or your financial situation could be shaky in the next five or ten years, you’ll likely want to find another type of loan.
There are several benefits to a construction to permanent loan:
- You can withdraw the exact amount of money you need at the times you need it.
- During building, you’re only charged interest on the amount you withdraw during the construction phase.
- You don’t have to apply, qualify, complete paperwork, or pay closing costs for two separate loans which saves you both time and money.
- Locking in a fixed interest rate is an option.
There are a few drawbacks to these types of loans too:
- This loan has higher fixed interest rates.
- Banks require higher credit scores.
- You may have to make a larger down payment.
- Additional documentation may be required like proof of your builder’s risk insurance.
- Your lender may want inspections every time you want to withdraw more money (which cost extra).
- Separate appraisals may be required for your lot and then finished home (which again costs extra).
- A penalty fee may be charged if your home takes longer to build than anticipated or if you try to pay off the loan early.
You can get construction to permanent loans at local and regional banks, credit unions, and banks that you already have an existing relationship with.
If a construction to permanent loan sounds like it might not be the best fit, you do have other options.
Alternatives to Construction to Permanent Loans
|Construction-Only Loan||Land Loan||Owner-
|End Loan||Construction to permanent loan|
|Can be used to buy the land||X||X|
|Can be used for construction||X||X||X|
|Paid directly to the builder||X||X||X||X|
|Is also your mortgage||X||X|
|Higher interest rates than traditional mortgages||X||X||X||X|
|20%-25% down payment is usually required||X||X||X||X|
|Minimum credit rating of 620||X||X||X||X||X|
And getting a construction to permanent loan is a simple four step process.
- Get pre-approved so you know how much you can spend.
- Find your land and builder.
- Finalize your plans with your builder and submit all needed paperwork to your lender. At this point, the lender usually orders an appraisal and inspection.
- Close on the loan, and your builder can break ground.
If you have the financial stability and are ready to build your dream home, construction to permanent loans are a great option. If you can wait, or think things could be shaky in five or ten years, you have alternatives. Either way you now have the information needed to make a decision on whether or not construction to permanent loans are the right choice for your situation.