How does a Construction Permanent Loan Work?

A Construction to Permanent mortgage (CP Loan) is a three-stage mortgage that allows you to finance the construction of your new home.  Most banks allow you lock your interest rate and close your loan before construction begins.  A true CP loan has only one closing with no need to re-qualify for the permanent phrase of the loan.

During construction, disbursements are made to cover the cost to build and interest, which is paid only on the outstanding balance.  When construction is complete, the loan converts to a permanent mortgage.  At that point, scheduled monthly payments of principal and interest plus escrows, if applicable, will take effect.

During the application/decision stage, a Construction to Permanent Loan there are certain terms that you need to be aware of.

Builder Review: Most mortgage companies require the right to review the builder and the construction contract.

Appraisal: Mortgage companies also will require a licensed real estate appraiser to review your plans, specifications, property and recent sales of comparable homes in your market to determine and estimated value of your home upon completion.

Draw Schedule: Your lender will require a schedule on how and when loan disbursements and draws will be made.

Title Review: Most mortgage companies will require your closing agent to issue a clear title to your property, to close your loan.

Disbursements: Prior to each disbursement, your bank will require and inspection to determine that the requisite work has been completed.  Your funds will be used first and then your bank's funds will begin disbursing your loan proceeds. For most banks, construction disbursement are limited to the amount that corresponds to the percentage of completion according to the disbursement schedule.  Funds are disbursed for labor and material that is completed or installed.  Usually disbursements are not  permitted if a lien has been filed against the subject property.

Inspections: To order an inspection, you will need to contact your bank who will arrange for a local inspector to inspect the percentage of completed work based on the draw schedule.  If you are concerned about quality of workmanship, you can contact a local inspector to request a quality inspection or discuss your concerns with the local building inspection department.

Conversion: Costs usually due at conversion:

  1. Initial escrow of pre-paid items (such as homeowners insurance and taxes, if applicable)
  2. Prepaid interest for permanent phase
  3. Unpaid construction phase interest
  4. Additional title insurance fees, if required

Conversion marks the completion of the CP loan process and the beginning of your permanent loan.  You will then begin your regular mortgage payments as structured in your permanent loan.

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