What Are Construction-To-Permanent Loans?

Ready to design and build your dream home? A Construction-to-Permanent loan may be right for you. Essentially, it’s a three-stage mortgage that covers all of your new home’s construction costs. The Construction-to-Permanent (CP) loan allows you to lock in your interest rate and close the loan before you begin work on your home. When the project moves to construction, the bank disburses the loan to cover the cost, and the borrower pays interest on the outstanding balance. After construction, the loan becomes a permanent mortgage, and monthly payments begin.

 Here’s how CP loans work, step-by-step:

Application

A Construction-to-Permanent Mortgage Loan Originator (MLO) will go over several CP loan options with you and gather any appropriate documents needed for the application. They will submit the application on your behalf, and the MLO will let you know when the bank reaches a decision.

In the Meantime

There are several steps in the application process. One crucial step is the builder review. The bank may want to review the builder and their contract, which can affect their decision to issue the loan. The builder will need to sign a standard Construction Loan Agreement with the bank, which states the bank’s position on the funds available for construction. Also, a licensed real estate appraiser will look over your plans, specifications, the property itself, and any recent sales of homes like yours on the market and use this information to determine an estimated value of your home. During this stage, your builder, the bank, and yourself will need to agree on how loan disbursements and draws will be made in the form of a Draw Schedule. The bank will work with a closing agent of your choice to make sure the title on the property is clear and then move to close.

Disbursement

If approved, the bank will require an inspection before each disbursement to determine if the necessary work has been completed on the project. You’ll order an inspection by contacting your bank’s Paralender, who will then call a local inspector to look over the amount of completed work based on the draw schedule. Funds go toward labor completed and material installed.

Conversion

“Conversion” refers to the construction phase of your loan moving to the permanent stage. Costs that may be due at this time include the initial escrow of prepaid items such as homeowners’ insurance and taxes, prepaid interest for the permanent phase, unpaid interest on the construction phase, and other title insurance fees. Regular mortgage payments begin after the loan has been converted.

Potential investors and buyers shouldn’t feel intimidated by this process. Regions Bank recently collaborated with Built, a payment technology firm and construction finance software specialist. Built seeks to simplify the administration of Construction-to-Permanent loans by using a cloud-based portal that synchronizes the builder, inspector, and lender in one place. Using the platform, builders and developers can view availability, ask for inspections, review business analytics, and inspectors can submit reports about construction progress from the site, which speeds up the funding process. “Built is an online platform that makes it easy for the clients to order inspections when they are ready for them and to request draws,” said Nicole Dupre, Mortgage Loan Originator at Regions. “It’s a place that builders and homeowners can come to view the status of the project at any time.” Since its launch, Built has helped clients decrease their turnaround times by over 50%. 

If you have any questions about Construction-to-Permanent loans and want to find out how we can help you reach your homeowning goals, call us at (504) 581-6427. Homestead Title is a full-service title and escrow company. Since 1934, we have provided our customers with competent, thorough, and professional service. Before each closing, we search public records to clarify legal and financial risks for lenders, realtors, and other stakeholders in the real estate transaction process. Our energetic and capable team of real estate title professionals provides accurate investigations, rapid turnaround time, streamlined paperless delivery, and exceptional customer service.