A construction-to-permanent loan is a specialized financing solution that combines a construction loan with a permanent mortgage into a single loan product. This loan type allows borrowers to fund both the construction of their new home and its long-term financing through one loan closing process.
Unlike traditional construction loans that only cover the building phase and require refinancing afterward, construction-to-permanent loans seamlessly transition from the construction phase to a permanent mortgage. This eliminates the need for a second closing and reduces overall closing costs.
How Construction-to-Permanent Loans Work
During construction, borrowers submit draws in phases to cover the cost of construction. The borrower makes payments on the interest during this time period. Construction-to-permanent loans are considered high risk, so capital partners are usually quite involved in ensuring that the project stays on time and on budget.
Once construction is complete and the certificate of occupancy is issued, the loan automatically converts to a permanent mortgage with principal and interest payments based on the full loan amount.
Benefits for Lenders
Lenders offering construction-to-permanent loans enjoy several significant advantages. Because these loans are more convenient for the borrower, they strengthen customer relationships and increase retention. The extended loan lifecycle also contributes to a longer customer relationship. The combined nature of these loans generates higher profit margins compared to standalone products, while the structured oversight of the construction process may help minimize lending risks. Additionally, offering these specialized loans gives lenders a competitive edge in the mortgage marketplace by distinguishing their services from traditional lenders.
Qualification Requirements
To qualify for a construction-to-permanent loan, borrowers typically need:
- Strong credit score (usually 680 or higher)
- Stable income and employment history
- Down payment of 20-25% of the total project cost
- Detailed construction plans and budget
- Licensed and insured contractor
Potential Drawbacks
While construction-to-permanent loans offer many advantages, borrowers should carefully consider several important limitations. These loans typically come with higher interest rates than traditional mortgages and must adhere to strict construction timeline requirements. Additionally, the application process demands more extensive documentation from both borrowers and contractors. The higher down payment requirements, usually 20-25% of the total project cost, can present a significant financial hurdle for some borrowers. These loans often restrict the ability to change contractors during construction, making the initial contractor selection particularly crucial.
Managing construction loans is easier with a real estate platform like Rabbet. Capital partners who use Rabbet get accurate, real-time data with built-in validation, reducing costly mistakes and risks. Lenders who use real estate management software report higher levels of confidence and efficiency compared to their counterparts. Talk to us today if you want to learn more about how Rabbet helps capital partners manage their real estate loans.
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