Orbit Home Loans

Your Complete Guide to the Construction-to-Permanent Home Loan

NEXT STEP Start Your Quote Online →

What is a Construction-to-Permanent Loan?

Video: The Construction-to-Permanent Loan Process

A construction-to-permanent home loan is one that is through Fannie mae and Freddie Mac. A lot like a conventional home loan, construction-to-permanent loan have been streamlined through the years to provide access to the mortgage market for all types of buyers; first time home buyers, first time move up buyers, and investors but mostly those who want to have the flexibility of building their own home.

A construction-to-permanent loan home loan is a large sum of money lent to a borrower by a mortgage lender. The important difference is that you will first have a line of credit for your construction and then once that is done your loan will be converted into a traditional conventional loan. Construction-to-permanent loan loans often have higher lending requirements but the benefits of meeting those requirements are returned with being able to build your future home. When a prospective homeowner is ready to shop around for a mortgage, they will work with their Orbit Home Loan mortgage broker. This is a financial professional who brings together borrowers and lenders. They are not lenders and, as such, do not use their own funds to advance mortgage loans. Instead, they act as intermediaries, helping consumers comparison shop, bringing them a variety of quotes from different lenders at one time

If you're ready to start your conventional loan, check your eligibility or have specific questions on the conventional loan, talk with a Home Loans specialist today.

Start Your Quote Online →

Loan Chart

How Do Conventional Loans Work?

Construction-to-permanent home loans work like this: Your Orbit Home Loan mortgage broker (Mortgage Banker) works on your behalf to qualify you with the most competitive lenders in the nation. Construction-to-permanent home which turn into conventional mortgages are typically lent out with 15 or 30 year repayment periods; the one that’s right for you depends on your personal finances, your income, and the interest rate you can secure. Once you are qualified, completed the process and have purchased the property your lender will sell your loan to Fannie Mae and Freddie Mac or but still function as the servicer of your loan and will be responsible for collecting your payments. It is important to remember that you payments includes your promise to pay back the lender with interest so they can pay Fannie Mae or Freddie Mac.

Interest is the percentage rate you pay to the lender and then to Fannie Mae and Freddie Mac for the trouble of lending you money. This is how the Fannie Mae and Freddie Mac and makes money from having lent you such a large sum. Interest rates are either fixed or adjustable and interest rates normally adjust daily but can adjust multiple times a day. The interest rate you receive on a conventional loan will also vary based on your own personal financial profile.

Interest rates and qualifications for a mortgage can vary significantly across the wide range of home loan products available to consumers, but conventional home loan terms tend to fall into a narrower set of categories. One distinction you’ll find between two types of mortgage products is conforming vs nonconforming loans.

Conforming VS Nonconforming

In the US, there are two federally run institutions that oversee a large portion of mortgage lending: Fannie Mae and Freddie Mac. The important takeaway is that conforming loans abide by lending standards put in place by Fannie Mae and Freddie Mac. Most importantly, these limits determine the possible size of the loan; In 2022, the conforming loan limit for a single-family home Is $647,200.

Nonconforming loans, sometimes called jumbo loans or Non-QM loans exceed these borrowing amounts. Nonconforming loans can vary more in their limits, rules, and conditions. Because they present a larger risk to lenders, they tend to come with higher interest rates. Non-conforming loans are not necessarily risky by default—though the Consumer Financial Protection Bureau warns they sometimes can be—but it’s still wise to read the fine print when shopping, and be sure to shop around before committing to any lender.

Types of Construction-to-Permanent Loans

1. Construction-to-Permanent Loan

A construction-to-permanent loan is a construction loan that converts to a permanent mortgage once building is completed. With this type of loan, all your financing is rolled into a single transaction, meaning you’ll only have to complete one application and go through one closing process. This can make financing your home simpler and potentially cheaper, as you’ll only be paying closing costs on one loan. Additionally, with a construction-to-permanent loan, you don’t have to worry about not being able to obtain financing for a mortgage once your home is completed. Once you have your approval for the loan, you won’t need to go through the approval process again; the loan will simply convert into a permanent loan when construction is completed.

2. Construction-Only Loan

A construction-only loan is exactly what it sounds like: you’re receiving the funds to cover only the cost of construction. After that, you’ll need to get another, separate loan to refinance the construction loan into a mortgage. With these types of loans, you’ll go through two separate application processes and two separate closings. This can mean extra documentation and paperwork, and possibly more money spent on overall closing costs. Why would someone want a construction-only loan? The main benefit of these types of construction loans is that they give you the freedom to shop around for your mortgage. When you get a construction-to-permanent loan, you’re limited to whatever rates and terms are offered by the construction loan lender. Construction-only loans allow you to find the mortgage that is best for you.

3. Renovation Loan

If, instead of building a whole, brand-new house, you want to buy a fixer-upper home to renovate and rehab, there are loans that allow you to do that. A 203(k) loan is one such type of loan. These are insured by the FHA and give home buyers the funds to purchase a home plus money to complete needed renovations. Conventional loan borrowers also have options for these types of loans with Fannie Mae’s Home Style® Renovation Mortgage and Freddie Mac’s CHOICE Renovation℠ Mortgage. Homeowners who want to fix up the home they currently live in can also refinance into one of these renovation mortgages, giving them the funds to renovate their current home.

If you don’t need a whole mortgage but just enough cash to pay for repairs or renovations, you may consider tapping into your equity with a home equity loan, home equity line of credit or cash-out refinance. Rocket Mortgage® does not offer home equity loans or home equity lines of credit but does offer cash-out refinances.

4. Owner-Builder Construction Loan

Owner-builder construction loans are aimed at individuals who wish to be their own general contractor instead of hiring a builder to manage the process and all the different subcontractors involved. While acting as your own general contractor can save money, this option is typically only available to those who have proven experience as a home builder or are licensed to oversee these types of projects.

Exploring the Construction-to-Permanent Loan

Construction-to-Permanent Purchase Loan

A home construction loan is used to cover the costs of building a home. Once the funds from the construction loan have been used and the house has been built, these loans are typically converted or refinanced into a standard, long-term mortgage loan. If you want to build a brand-new house from the ground up but don’t have the funds to do so out of pocket, a construction loan will likely be your best option. These are short-term loans – funds are typically available for a year or so while construction is completed. After that, the loan will need to be converted into a mortgage loan or paid off by other means.

Before you can get a construction loan, you need a plan. A plan for your future house, that is. To be approved for a construction loan, not only will you have to go through the typical process of proving your creditworthiness and ability to repay the loan, you’ll also have to show the lender detailed plans for the project, including cost estimates. The lender may also need to approve of the company that’s building your home.

You won’t be approved for a construction loan until you have all these details sorted out. However, you may want to start having conversations with potential lenders before you begin the planning process, so you can get a better idea of how much you’ll likely be able to borrow. Once you’ve got your plan and your loan approval, and you’re preparing to break ground, your builder will receive the first disbursement of the funds. With construction loans, the money isn’t given to you in one large, lump sum. Instead, the builder receives a series of disbursements called “draws.” Whenever your builder requests a new draw for the next stage of work, an inspector will come to the site and check out the progress on behalf of the lender. Before you break ground, be sure both you and your builder understand the lender’s draw schedule, including when and how disbursements are made. During building, you can typically make interest-only payments on the loan, and you’ll only be charged interest on the amount that’s been disbursed.

Construction-to-Permanent Cash-Out Refinance

Since a construction-to-permanent does end as traditional loan you will be able to do a cash-out refinance.

Check Your $0 Down Eligibility Today (CLICK)

What Are Construction-to-Permanent Loan Limits?

The conforming loan limit is designated by county. Most counties are assigned the baseline conforming loan limit. However, there can be variations on the conforming loan limit based on regional economic differences.

For example, in areas where 115% of the local median home value exceeds the baseline conforming loan limit, the maximum loan limit for that area will be set higher. HERA sets the maximum loan limit for such areas as a multiple of the area median home value. The legislation also set a ceiling on the limit of 150% of the baseline loan limit.

What is The Construction-to-Permanent Funding fee?

Do not worry. As some loan products do have an additional funding fee conventional loan do not. This is one of the many benefits of taking on a conventional loan. Is the Construction-to-Permanent loan a good option?

If it has always been your dream to build a custom home this might be your best choice. Having the flexibility to build your dream home is something not everyone gets to experience. One benefit is that this loan works like a line of credit in that you're allowed to draw exactly the amount of money you need at the time you need it. Another benefit is that you're charged interest only on the amount you draw on during the construction phase.

How do I Get a Construction-to-Permanent Loan?

Talk with a trusted lender that knows Construction-to-Permanent loans and how to get the most from this hard-earned benefit. The process typically starts with getting preapproved, which can often be done in minutes using your phone, laptop or tablet.

Loan preapproval is a key first step before making an offer on your dream home. Having that preapproval letter gives you a clear sense of your buying power and shows sellers and listing agents you have what it takes to get to closing.

Start my Construction-to-Permanent loan with Orbit Home Loans -- the Nation's #1 Construction-to-Permanent purchase lender

If I’ve previously used a Construction-to-Permanent Loan, Can I Use it Again?

Yes, this is not a one-time option. Once you earn Construction-to-Permanent loan benefit, it's yours for life. You can reuse the Construction-to-Permanent loan over and over again, and it's even possible to have more than one active Construction-to-Permanent loan at the same time.

Continue to learn more about Construction-to-Permanent loan eligibility in our next section.

Get started with your Digital Mortgage