What is a Construction-to-Permanent Loan?
A construction-to-permanent (C2P) loan, also called a single-close construction loan, combines construction financing and permanent mortgage financing into a single loan with one closing. During the construction phase, you draw funds as work progresses and make interest-only payments on the amount drawn. Once construction is complete, the loan automatically converts to a permanent mortgage (fixed or adjustable rate) without requiring a second closing, second set of closing costs, or new qualification process.
For real estate investors building from the ground up or doing major renovations (gut rehabs, additions, conversions), C2P loans simplify the financing process and eliminate the risk of not qualifying for permanent financing after construction is complete.
How draws work
During construction, you don't receive the full loan amount upfront. Instead, funds are disbursed in draws based on completed construction milestones. A typical draw schedule might be:
Draw 1 (10%): Foundation complete
Draw 2 (15%): Framing complete
Draw 3 (15%): Roof, windows, exterior complete
Draw 4 (20%): Rough mechanicals (plumbing, electrical, HVAC) complete
Draw 5 (20%): Interior finishes (drywall, flooring, cabinets) complete
Draw 6 (20%): Final completion and certificate of occupancy
Before each draw, the lender sends an inspector to verify the work is complete. You only pay interest on the amount that has been drawn, not the full loan amount. This keeps carrying costs low during the early stages of construction.
C2P vs. two separate loans
| Feature | C2P (single close) | Two separate loans |
|---|---|---|
| Closings | One | Two (construction + permanent) |
| Closing costs | Paid once | Paid twice |
| Rate lock | Locked at initial close | Must qualify/lock again |
| Requalification risk | None | Must requalify for permanent |
| Rate during construction | May be higher | Construction rate may be lower |
For investors
C2P loans are available for investment properties from some portfolio lenders, credit unions, and construction lenders, though they're less common than for owner-occupied construction. The lender evaluates both the construction project (plans, budget, contractor qualifications, projected value) and the borrower's financial profile. Construction experience matters — lenders are more willing to finance investment property construction for borrowers who have completed previous projects successfully.
Down payment requirements for investment C2P loans are typically 20-30% of the total project cost (land + construction). Interest rates during the construction phase may be higher than conventional mortgage rates, and the permanent rate is locked at closing based on the anticipated conversion date.