This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.
When clients come to us with a plan to build a home from scratch, they often ask us: “Why can’t I just use a traditional mortgage to build my dream home?”
Simply put, traditional mortgages are not designed for the complex finances of the construction process itself.
Like any good carpenter will tell you, use the right tool for the right job.
However, traditional mortgages can be vital when transitioning from a construction loan to long-term financing.
Alternatively, you can choose a Construction-to-Permanent Loan that bypasses the need for a conventional mortgage altogether.
So, what’s the difference between Construction-to-Permanent Loans vs. traditional mortgages? How can you decide which is the right path for you?
Let’s explore how Construction-to-Permanent Loans differ from traditional mortgages and how each can fit into the home-building journey.
Apply now with MIDFLORIDA Credit Union.
What is a Construction-to-Permanent Loan?
The big idea here is how a Construction-to-Permanent Loan is a single loan. Financing is provided for a home's construction phase, and the mortgage for when the property is completed.
This streamlined option eliminates the need for separate loan approvals and closings, simplifying the process for borrowers.
How Construction-to-Permanent Loans work
- Construction phase: During this phase, funds are disbursed incrementally to pay builders and suppliers as construction progresses—typically paying only the interest on the disbursed amount.
- Permanent phase: Once construction is completed, loans will automatically transition into an agreed-upon traditional mortgage, with fixed monthly payments covering principal and interest.
- Single closing: You’re closing on the loan only once, consolidating costs and paperwork into a single event.
Why traditional mortgages are not suitable for construction phases
Traditional mortgages are specifically designed for already completed properties ready for occupancy.
For several reasons, they are not appropriate for the construction phase of home building:
- Immediate collateral requirement: Traditional mortgages require a finished home as collateral—an incomplete property cannot meet this requirement.
- No staged disbursements: Traditional mortgages provide a lump sum at closing, which does not align with the incremental funding needs of construction projects.
- Inflexibility: Traditional mortgages lack the mechanisms needed to manage the complexities of construction, such as inspections, draws, and milestones.
While traditional mortgages won’t fit the construction phase, they become essential once the home is built and ready for occupancy, as they offer the long-term stability you’ll need for homeownership.
How a traditional mortgage fits into Construction-to-Permanent Loans
Construction-to-Permanent Loans are also called one-time close loans, where the traditional mortgage is integrated directly into the loan structure.
It's a seamless process for the borrower, simplifying the transition from construction financing to long-term repayment.
Benefits of this approach:
- Convenience: Borrowers secure both construction financing and the permanent mortgage with a single application and approval.
- Rate lock: Many lenders allow borrowers to lock in their interest rate during the initial approval, providing financial predictability.
- Cost savings: By combining the two phases into one loan, borrowers save on closing costs and reduce administrative burdens.
This structure is ideal for those who want a straightforward path from construction to permanent financing without the need to reapply for a separate mortgage.
How a traditional mortgage can fit with a standard construction loan
However, there is a scenario when a separate traditional mortgage can be used in your home-building plan by combining it with a standard construction loan.
Also called a two-time close construction loan, borrowers secure a short-term loan to fund the build and then transition to a separate, traditional mortgage after construction.
How it works
- First loan: The construction loan covers the costs of building the home. This is a short-term loan, often with interest-only payments during construction.
- Second loan: Once construction is finished, the borrower applies for a traditional mortgage to pay off the construction loan and finance the completed home over the long term.
Benefits of this approach
- Flexibility: Borrowers can shop for the best mortgage rates and terms after construction.
- Customization: Borrowers can tailor each loan to their specific needs by separating the construction and permanent phases.
- Rate competitiveness: Waiting until construction is complete allows borrowers to take advantage of potentially better rates in the future.
However, the two-time close approach does come with additional costs, as borrowers must go through two separate closings, each with its own fees.
Choosing the right loan structure
When deciding between a one-time close and two-time close structure, consider the following:
Financial stability
A one-time close loan offers simplicity and predictability, making it a good fit for borrowers who prefer a streamlined process and want to secure their rate upfront.
A two-time close loan provides flexibility for those who want to explore competitive mortgage options after construction.
Timeline and complexity
If your construction project is straightforward and you value convenience, a Construction-to-Permanent Loan is likely the better choice.
A two-time close loan may offer the flexibility needed to manage changes for more complex builds.
Why MIDFLORIDA is the right choice
Whether you need a Construction-to-Permanent Loan or are planning a two-time close process, MIDFLORIDA Credit Union has the expertise and resources to help you every step of the way.
Streamlined construction financing
MIDFLORIDA offers competitive Construction-to-Permanent Loans with options to lock in your rate, saving you time and money.
Personalized service
As a trusted credit union, MIDFLORIDA takes pride in offering tailored solutions and local expertise to help you finance your dream home.
Start your MIDFLORIDA application today
Ready to build your dream home? Find out how Construction-to-Permanent Loans can become your dream home solution with MIDFLORIDA.
Every year, we fund millions of dollars in loans; yours could be next.
Apply for a MIDFLORIDA loan today, or contact one of our knowledgeable loan officers.
Let us help you make your homeownership dreams a reality!
