Construction to permanent loan options look similar on a brochure and behave very differently once the foundation is poured. Some programs close once and convert on their own. Others require a second closing, a fresh credit pull, and a new appraisal at completion. Rate lock rules, builder approval standards, and how land equity counts toward your down payment all vary by program and by lender. Duane Buziak, NMLS #1110647, works with wholesale lenders every day and sees how much those details change what a build costs.
The seven strategies below are decisions to make in order, before you sign a builder contract. Most of them are cheap to settle early and expensive to fix later. Where a program’s rules depend on current agency guidance or a specific lender’s menu, confirm the details before you commit.
1. Match the Loan Structure to Your Build: One-Time Close vs. Two-Time Close
A one-time close (also called single-close) is one loan with one closing. You pay interest only on funds drawn during construction, and the loan converts to a permanent mortgage when the home is finished. A two-time close is two separate loans: a short-term construction loan, then a new mortgage you qualify for at completion. The mechanism that matters is risk. With two-close, you are underwritten twice, so a job loss, a credit event, or a rate spike during the build can hurt you at the second closing.
Consider an illustration. A buyer owns a $90,000 lot and plans a $400,000 home. Single-close fits because the buyer wants certainty that the loan converts without a new approval after months of building. Two-close might offer a lower initial rate or more flexibility to shop for the permanent loan, but the buyer takes on the second closing and requalification risk.
Single-close is not automatically cheaper. It often carries a slightly different rate or fee structure, and it may limit your ability to change lenders if rates fall. Weigh both paths on paper.
- List the program you need (conventional, FHA, VA, or another).
- Ask whether that program is offered as single-close, two-close, or both.
- Get a closing cost estimate for each path, including the second closing if there is one.
- Confirm conversion terms in writing: how the rate is set, whether requalification is required, and what happens if completion runs late.
Common mistake: choosing two-close because the initial rate looks lower, without pricing in the second set of closing costs and the chance of being denied or repriced at conversion. What to measure: total closing costs across all closings, and a yes or no on whether requalification is required.
The Consumer Financial Protection Bureau publishes general guidance on construction loans that is worth reading before you compare structures.
2. Decide Whether to Lock the Rate Before Breaking Ground
You have three basic choices: float the rate until the build is near completion, lock for the full construction period, or lock with a float-down option that lets you capture a lower rate if the market improves. Floating exposes you to rate increases. A long lock protects you but usually costs more, and it may be priced differently from a standard 30 to 60 day lock. A float-down splits the difference, though the terms (fee, trigger, how many times it can be used) differ by lender.
A worked illustration of what a quarter point costs
This is a hypothetical, not a quote. Suppose your permanent loan is $450,000 over 30 years. The monthly principal and interest payment uses the standard formula: M = P × r / (1 − (1 + r)^−n), where r is the monthly rate and n is 360.
- At 6.00% (r = 0.005), the payment is about $2,698 per month.
- At 6.25% (r ≈ 0.0052083), the payment is about $2,771 per month.
The difference is roughly $73 per month, or about $26,000 over 30 years, from a 0.25% move. That figure is the most you would risk by floating through a build, and the amount a lock or float-down fee has to be weighed against.
Putting it into practice: get the expected build timeline from your builder, including a realistic buffer, then ask each lender for lock length, extension fees, and float-down terms. Compare the cost of a longer lock with the cost of one or two extensions.
Common mistake: assuming a lock survives a delay. Weather, permits, and material shortages push schedules, and extensions are usually priced per period. What to measure: lock expiry date against projected completion date, and the dollar cost of any extension.
3. Size the Down Payment and Loan-to-Value Using the Appraised Future Value
Construction loans are generally sized off the lesser of cost or the as-completed appraised value, which is the appraiser’s estimate of what the finished home will be worth based on plans and specs. Your loan-to-value ratio is calculated against that figure, not against what you have paid so far. That is why the same buyer can need very different cash amounts depending on how the lender counts the lot.
As an illustration, if you own your land outright, many programs may credit it as equity toward the down payment, reducing cash needed at closing. If you are still paying off the lot, the payoff is typically folded into the loan. The treatment varies by lender and program, so confirm it with your loan officer rather than assuming.
- Gather the land purchase documents, including the settlement statement and any payoff or lien information.
- Collect the plans, specifications, and the builder’s itemized budget.
- Ask your loan officer for an LTV worksheet showing the lot value, construction cost, as-completed value assumption, and cash required.
- Compare the result with your verified liquid funds.
Common mistake: counting land equity or an assumed appraised value that the appraisal does not support. If the appraisal comes in under the budget, the gap is yours to cover. What to measure: cash needed at closing against verified liquid funds, with a margin left over.
Loan limits also shape sizing. The Federal Housing Finance Agency publishes the conforming loan limits each year, and the 2026 figures should be checked there before you decide whether your loan is conforming or jumbo.
4. Explore Government-Backed Construction-to-Permanent Programs
FHA, VA, and USDA each have paths for building a home, and they may offer lower down payment requirements or more flexible credit standards than conventional financing. The mechanism is the government guarantee or insurance, which lets participating lenders accept profiles they otherwise might not. The catch is that lender participation is uneven. Many lenders do not offer government construction loans at all, and the rules are not the same as for buying an existing home.
Consider an illustration. A buyer with a lower credit score and limited savings looks at an FHA one-time close. Before stating any limit, verify current rules on HUD.gov, since minimum credit, down payment, and loan limits change. The same caution applies to VA and USDA programs.
- FHA: a one-time close construction-to-permanent option exists. Check HUD for current requirements.
- VA: construction financing is available through participating lenders, and entitlement is part of the math. Your Certificate of Eligibility can typically be pulled electronically with your SSN and date of birth. If you have used entitlement before, second-tier (bonus) entitlement may apply: the county loan limit times 25% gives the maximum guarantee, you subtract entitlement already used, and multiplying the remainder by four gives the zero-down purchase limit.
- USDA: eligibility depends on property location and household income, so check the program map and limits on USDA.gov.
Putting it into practice: review the current rules on HUD.gov, VA.gov, and USDA.gov, then ask which lenders in your broker’s network offer the program as construction-to-permanent. Roster lenders and their construction products change, so ask for what is currently available rather than relying on a list.
Common mistake: assuming every lender offers government construction loans, or that existing-home rules carry over. What to measure: the number of lenders actually available for the program, and the resulting rate and cost comparison against conventional.
5. Plan the Draw Schedule and Builder Approval Before You Apply
Construction funds are not handed over at closing. They are released in stages, called draws, as work is completed and an inspector verifies progress. During this period you generally pay interest only on the amount drawn. Lenders also approve the builder, not just the borrower, because their collateral depends on the builder finishing the job.
The way this goes wrong is usually administrative. In an illustration, a builder’s missing insurance certificate delays approval by several weeks. The buyer’s rate lock clock keeps running, and an extension fee follows. Nothing was wrong with the loan or the builder’s work, only the paperwork.
- Ask your builder for a license, proof of insurance, a signed contract, plans, specifications, and an itemized budget.
- Ask the lender which documents they require for builder approval and how long it typically takes.
- Get the draw request process in writing: who submits, who inspects, and how quickly funds are released after an inspection.
- Agree with the builder on how the draw schedule matches their payment expectations to subcontractors and suppliers.
Common mistake: signing a builder contract before confirming the builder meets lender approval requirements. If the lender will not approve the builder, you may have to change builders or financing. What to measure: days from application to builder approval, and the time between a draw request and funding, since slow draws can stall a crew.
Fannie Mae’s Selling Guide describes how conventional construction-to-permanent loans are handled for loans sold to Fannie Mae, which is useful background on why lenders ask for what they do.
6. Build a Contingency and Budget Cushion Into the Loan
Change orders, material price swings, and site surprises are normal on builds. A contingency is money set aside for them. The mechanism is simple: if the budget has no room, every overrun becomes an out-of-pocket expense during the stretch when you are also paying rent or a mortgage elsewhere plus construction interest.
Take a hypothetical. A 5% contingency on a $400,000 budget is $20,000. If the lender allows that amount to be financed, the loan amount rises and your required reserves and payment change accordingly. If the program does not allow it, the same $20,000 must come from your savings, on top of the down payment.
- Ask each lender whether a contingency can be included in the loan and how unused funds are handled at completion.
- Set a written change-order policy with the builder: who approves, how pricing is documented, and how changes are paid for.
- Keep your reserve in liquid accounts, not tied up in investments with penalties or delays.
- Review the budget against actual costs at every draw.
Common mistake: spending all available cash on the down payment and leaving nothing for overruns. A buyer who closes with zero reserves has no response to a $10,000 surprise. What to measure: remaining contingency as a percentage of the unspent budget at each draw. If you have used 40% of the contingency but only 20% of the work remains, the plan needs attention before the next draw, not after.
7. Use an Independent Broker to Compare Wholesale Lenders for Your Scenario
A lender calling you back from its own menu can only show you its own programs. Duane Buziak is an independent broker with wholesale relationships across many lenders, and can line up several programs against the same build. That matters here because construction products are not universal: lenders differ on whether they offer single-close, how long the lock runs, how conversion works, and whether requalification applies. Duane has wholesale broker access to lenders including UWM, PennyMac, Newrez, CMG Financial, and others, though which of them offer construction financing on a given day should be confirmed for your scenario. This is a broker relationship, not an affiliation with any lender.
What a side-by-side comparison looks like
The table below is an illustration of the structure of a comparison, using hypothetical program types rather than quotes from any named lender.
| Feature | Program A (single-close) | Program B (two-close) | Program C (single-close, float-down) |
|---|---|---|---|
| Number of closings | One | Two | One |
| Requalification at completion | Confirm with lender | Yes, new underwriting | Confirm with lender |
| Lock length | Confirm with lender | Short-term, set at second loan | Extended, with float-down option |
| Extension fees | Ask for schedule | Applies at second loan | Ask for schedule |
| Total estimated closing costs | Request estimate | Request both estimates | Request estimate |
- Request a pre-qualification, which does not impact your credit.
- Share your plans, lot details, and builder information.
- Review the side-by-side comparison with Duane at 804-212-8663.
Common mistake: calling one lender directly and assuming its menu represents the whole market. What to measure: the number of programs compared, and the difference in total cost between the top two options.
Where to Start, and How the Decisions Stack
Settle the structure first, single-close or two-close, because it determines everything downstream, including whether you face requalification. Then set the lock plan against a realistic build timeline. Then confirm builder approval before you sign anything, since a delay there costs time on the lock. The down payment, government program, and contingency questions fit inside those three choices.
Your dream home is within reach. Discover how wholesale mortgage rates can put more money back in your pocket while you secure the financing you need. Get your personalized rate estimate today with no credit impact and see exactly what you qualify for with the Mortgage Maestro’s expert guidance. You can also call Duane Buziak at 804-212-8663.