Construction loans are temporary loans in that they are set up to be drawn on in stages of completed construction. When construction is complete, you would then have to take steps to end the construction stage of lending and somehow end up with a permanent loan. If you took out a "Construction to Perm" loan, this is easy. If you didn't, you will have to reapply for a permanent loan. The following information will help you to walk through "converting" a construction loan to a permanent loan.
Modifying Instead of Converting
If you took out a Construction to Perm loan, good news! You do not have to close again. The Construction to Perm loan allows you to modify your construction loan to the permanent stage, which can be any term that you chose when the Construction to Perm lender offered it to you at the beginning of the construction stage. You normally do not have to requalify for the permanent loan.
About 30 days from construction completion, your lender will begin asking when to expect the Certificate of Occupancy from your county and the appraisers final inspection as the lender begins getting the file ready to affect modification. Some lenders have you go to your closer (Attorney or Title Company), and have them administer the modification package. Some lenders simply send out the package to you with instructions of where to sign, and which documents need to be notarized. Once this is completed, send the file back, and you'll be done.
Benefit of Construction-to-Perm Loan
Be aware that a Construction to Perm loan requires only one closing and saves you lots of costs as well as many stress reducing features. When in the planning stage, and searching for a lender, try to use this type of loan if possible.
If Refinancing is Necessary
If you have to refinance into a new permanent loan, gather up all of the documents that you used when you applied for the construction loan, updating the income and asset documents, and make an appointment with a lender. It may take three to four weeks to process the file, so check your dates with the construction lender. They have a daily interest charge on the balance of your construction loan, so it makes sense to start this process at least thirty days before your project is completed.
Making a Punch Out List
Make a list of what you feel still needs doing after you've made visits to the property for visuals on the progress. This "punch out" list should be completed before closing. In the event some items cannot be completed before closing, get an agreement in writing with your builder that the "punch out" list will be completed after closing, and have a completion by date. (Try to avoid the situation of outstanding tasks with the builder, but sometimes weather, material delivery delays, etc. can cause delays).
Schedule a Closing
Contact the closer (Attorney or Title Company) that you used to close your construction loan if possible. They already have the initial closing and can pull up the file and continue with the new closing of your new permanent loan. If this is not possible, ask your new lender to suggest a preferred closer. Their suggestion will always be one where customer service is always superb.
The Final Inspection
Your new lender will order the appraiser to do a final inspection. You may want to be there when he comes out and walk through the home with him. If you have done your own visual prior to the appraiser's visit, and made notes, bring them and go over them with the appraiser. He is not only going to recertify that the value is still what he initially appraised it at, but he is going to state that the home is now complete per plan.
Construction Credit Considerations
Be aware of credit during construction. If you are having to refinance a construction loan into a permanent loan, do not be tempted to overuse credit cards or open new accounts during construction. Lower scores (or higher debt ratios) can cause your new permanent loan to be turned down
- Bankrate: Learn the Nuts and Bolts of Home Construction Loans
- Fannie Mae: Conversion of Construction-to-Permanent Financing - Single-Closing Transactions
- Money Alert: Converting a Construction Loan to Permanent Financing Process
- Consumer Financial Protection Bureau. "What Is a Construction Loan?" Accessed Sept. 18, 2020.
- Quicken Loans. "Construction Loans: What Are They, And How Do They Work?" Accessed Sept. 18, 2020.
- Porter Wright. "Construction Loan Draw Procedures - Residential and Commercial." Accessed Sept. 18, 2020.
- LendingTree. "Your Guide to the Ins and Outs of Home Construction Loans." Accessed Sept. 18, 2020.
- Arbor Financial Credit Union. "Construction Loans: Can You Use Land As a Down Payment?" Accessed Sept. 18, 2020.
- ConstructionLoans.com. "Owner Builders." Accessed Sept. 18, 2020.
- Be aware that a Construction to Perm loan requires only one closing and saves you lots of costs as well as many stress reducing features. When in the planning stage, and searching for a lender, try to use this type of loan if possible.
- Be aware of credit during construction. If you are having to refinance a construction loan into a permanent loan, do not be tempted to overuse credit cards or open new accounts during construction. Lower scores (or higher debt ratios) can cause your new permanent loan to be turned down
Joey Campbell spent eight years in real estates sales and property management. She has been active in residential and commercial mortgage for the past 23 years in the Southeastern U.S. Campbell has attended hundreds of seminars, and has written and conducted workshops on subjects such as credit, debt excelleration and prequalifying for residential mortgages.