New Construction Loans: How Construction-to-Permanent Financing Works
Financing new construction is structured differently from a standard mortgage on an existing home, largely because there's no finished property yet to serve as collateral in the usual sense. Construction-to-permanent loans are the most common way buyers handle this, combining the building phase and the long-term mortgage into a single process. The two-phase structure A construction-to-permanent loan has two distinct phases. During the construction phase , the lender releases funds in stages ("draws") as the builder completes agreed-upon milestones, and the borrower typically pays interest only on the amount drawn so far, not the full eventual loan amount. Once construction is complete, the loan automatically converts into a standard permanent mortgage, without a second closing or new loan application. How draws and inspections work Rather than disbursing the full loan amount upfront, the lender releases funds incrementally, tied to completed stages (foundation, fr...