Quick Answer: What is a Construction-to-Permanent Loan?
A construction-to-permanent loan (single-close construction loan) combines construction financing and your permanent mortgage into one loan with one closing, one rate lock, and one set of fees.
How it works: Close on the loan before construction starts → Make interest-only payments during 6-12 month construction → Loan automatically converts to 30-year fixed mortgage after completion → No second closing or refinance required.
Key advantage: Lock your permanent mortgage rate TODAY (e.g., 6.5%) before construction begins. Even if market rates rise to 7.5% during the 9-month construction period, you keep your 6.5% rate for 30 years.
Single-Close vs Two-Close: Why Single-Close Wins
| Feature | Single-Close | Two-Close |
|---|---|---|
| Number of Closings | 1 closing | 2 closings |
| Closing Costs | $24K-$36K | $48K-$72K (double) |
| Rate Lock | Lock before construction | Lock after completion (rate risk) |
| Appraisals | 1 appraisal | 2 appraisals |
| Conversion | Automatic | Manual refinance required |
Real Savings Example: $1.2M Bergen County Build
Single-Close: Pay $28,800 in closing costs once (2.4% of $1.2M loan). Lock 6.5% rate in March before construction. Home completes in November, market rates now 7.25%. Your rate stays 6.5%, saving $525/month for 30 years = $189,000 total savings.
Two-Close: Pay $28,800 at construction closing + $28,800 at permanent closing = $57,600 total costs. Rate at 7.25% (market rate in November). No rate lock protection.
Requirements for Construction-to-Permanent Loans
Financial Requirements
- Down Payment: 20-25% of total project cost (land + construction). $1.2M project = $240K-$300K down.
- Credit Score: 680 minimum, 720+ recommended for best rates and terms.
- Debt-to-Income Ratio: 43% maximum (36% preferred). Calculate DTI using permanent mortgage payment, not interest-only construction payment.
- Cash Reserves: 6-12 months of permanent mortgage payment (PITI) in liquid savings after closing. $1.2M loan at 6.5% = $7,580/month PITI = $45K-$90K reserves required.
Builder & Project Requirements
- Licensed General Contractor: Must be licensed, insured, and bonded in New Jersey with 5+ years experience and 3+ completed projects.
- Detailed Construction Plans: Architectural plans, engineering reports, itemized construction budget with contractor bids.
- Construction Timeline: Maximum 12 months from start to completion (most lenders), with realistic milestone schedule.
- Appraisal: Based on completed home value (as-completed appraisal) using plans and specifications, not current land value.
Bergen County Custom Home Example
Scenario: $1.8M Custom Build in Alpine, NJ
Land Purchase: $700,000 (existing teardown or vacant lot)
Demolition (if teardown): $25,000
New Construction: $1,075,000 (4,300 sqft at $250/sqft)
Total Project Cost: $1,800,000
Down Payment (25%): $450,000
Loan Amount: $1,350,000
Locked Permanent Rate: 6.25% (30-year fixed)
During Construction (9 months):
Interest-only payments at 8.5% construction rate on drawn funds. Month 1: $10,000 drawn for permits/site work = $71/month interest. Month 5: $675,000 drawn (50% complete) = $4,781/month interest. Month 9: $1,350,000 fully drawn = $9,563/month interest (peak).
After Conversion to Permanent Mortgage:
Monthly P&I: $8,536 at 6.25% locked rate. Property taxes: ~$1,800/month ($21,600/year). Homeowners insurance: ~$350/month. Total PITI: ~$10,686/month. If rates rose to 7.0% during construction, you save $562/month = $202,320 over 30 years with your 6.25% lock.
Construction Draw Process
Construction-to-permanent loans fund in stages (draws) as work is completed, not as a lump sum. This protects both you and the lender.
Land/Lot Purchase (10% of Budget)
Initial draw funds land acquisition, permits, and site preparation. Example: $100,000 on $1M construction budget.
Foundation (15-20%)
After foundation inspection passes, lender releases $150K-$200K for foundation and underground utilities.
Framing & Rough-In (30-35%)
Frame is complete, roof is on, windows/doors installed, HVAC/plumbing/electrical rough-in done. Draw: $300K-$350K.
Drywall & Interior (20-25%)
Drywall hung and finished, insulation complete, interior trim started. Draw: $200K-$250K.
Final & Certificate of Occupancy (10-15%)
All work complete, final inspection passes, CO issued. Final draw: $100K-$150K released after final walkthrough.
Ready to Build Your Custom Home in Northern NJ?
I specialize in construction-to-permanent financing for custom builds, teardowns, and new construction in Bergen, Morris, Passaic, and Essex Counties. Let's lock your rate and start building.
Frequently Asked Questions
What is a construction-to-permanent loan?
A construction-to-permanent loan (also called single-close construction loan) combines construction financing and permanent mortgage into one loan with one closing. During the 6-12 month construction period, you make interest-only payments on funds drawn from the construction budget. Once construction is complete and the home passes final inspection, the loan automatically converts to a traditional 30-year fixed or adjustable-rate mortgage with principal and interest payments. This differs from two-close construction loans where you close on construction financing first, then refinance into a permanent mortgage after completion, requiring two closings, two sets of fees, and two appraisals.
What are the down payment requirements for construction loans in NJ?
Most construction-to-permanent loans in New Jersey require 20-25% down payment of the total project cost (land + construction). Example: $1.2M total project ($300K land + $900K construction) requires $240K-$300K down payment (20-25%). Some lenders offer 10-15% down programs for borrowers with excellent credit (740+) and strong reserves (12+ months). VA construction loans allow 0% down for eligible veterans building in approved developments. FHA construction loans are rare but allow 3.5% down for qualified builders. The down payment can come from: Cash savings, sale proceeds from current home, equity from owned land, gift funds from family members.
How does the rate lock work during construction?
One of the biggest advantages of construction-to-permanent loans is locking your permanent mortgage rate at loan approval, before construction begins. Your interest rate is locked for the entire construction period (6-12 months) plus closing timeline. During construction, you pay interest-only on the variable construction rate (typically prime + 1-2%). After construction completes, your locked permanent rate takes effect. Example: Lock 6.5% rate in March 2025 when applying. Pay interest-only at 8.5% during 8-month construction. Home completes in November 2025, market rates are now 7.25%. You convert to your locked 6.5% rate, saving 0.75% for 30 years. If market rates drop significantly during construction, some lenders offer float-down options (for a fee of 0.25-0.5% of loan amount) to capture lower rates.
What credit score do I need for a construction loan?
Construction loans require higher credit scores than standard mortgages due to increased lender risk. Minimum credit score: 680 (most lenders), 720+ recommended for best rates and terms. Credit score impact: 680-699 = Higher rates (6.5-7.5%), 20-25% down required, stricter reserve requirements. 700-739 = Standard rates (6.0-7.0%), 20% down may be sufficient, 6-12 months reserves. 740+ = Best rates (5.5-6.5%), 10-20% down options available, competitive terms. Credit requirements include: No bankruptcies within 4 years, no foreclosures within 7 years, DTI below 43% (36% preferred), no late payments in last 12 months, sufficient credit history (3+ tradelines).
How much does it cost to build a custom home in Bergen County?
Bergen County construction costs range from $250-$500+ per square foot depending on finishes, location, and customization. Budget-Friendly Build: $250-$325/sqft (standard finishes, production-style details). 3,000 sqft home = $750K-$975K construction cost. Mid-Range Custom: $325-$400/sqft (upgraded finishes, semi-custom features). 3,500 sqft home = $1.14M-$1.4M construction cost. Luxury Custom: $400-$500+/sqft (high-end finishes, full customization, smart home tech). 4,000 sqft home = $1.6M-$2M+ construction cost. Additional costs: Land acquisition ($300K-$1M+ in premium towns like Alpine, Saddle River, Franklin Lakes), permits and fees ($25K-$50K), architect and engineering ($50K-$100K), site work and utilities ($30K-$75K), landscaping ($25K-$100K). Total project costs in Bergen County typically range from $1.2M to $3M+ for custom single-family homes.
What is the difference between single-close and two-close construction loans?
Single-Close (Construction-to-Permanent): One application, one approval, one closing. Lock permanent rate before construction starts. Pay one set of closing costs (~2-3% of loan). One appraisal (based on completed home value). Converts automatically to permanent mortgage after construction. Total costs: $24K-$36K on $1.2M loan. Two-Close (Construction-Only then Refinance): First closing: Construction loan (6-12 month term, variable rate). Second closing: Permanent mortgage after completion. Pay closing costs twice (~2-3% each time). Two appraisals (during construction + after completion). Refinance risk if rates rise or appraisal comes in low. Total costs: $48K-$72K on $1.2M loan (double). Single-close is almost always better unless: You plan to pay cash after construction completes, You're certain rates will drop significantly, You have unique circumstances requiring flexibility.
Can I act as my own general contractor with a construction loan?
Most construction-to-permanent loans require a licensed general contractor, but owner-builder programs exist for qualified borrowers. Requirements to act as your own GC: Previous construction experience (built at least one home), detailed construction knowledge and project management skills, 25-30% down payment (higher than standard 20%), licensed and insured subcontractors for all work, comprehensive construction budget with contractor bids, 12+ months cash reserves, excellent credit (740+). Owner-builder benefits: Save 15-20% general contractor markup ($135K-$180K on $900K construction budget), full control over subcontractor selection, direct oversight of all work. Owner-builder challenges: Lenders require more documentation and oversight, draw inspections are more rigorous, delays can be costly if you lack experience, difficult to qualify without proven track record. Most borrowers should use a licensed GC for construction-to-permanent loans to ensure lender approval and smooth draws.
How long does construction financing take in New Jersey?
Construction-to-permanent loan timeline from application to breaking ground: Loan Application: 1-2 weeks (gather documentation, builder contracts, construction plans). Underwriting & Approval: 3-5 weeks (lender reviews builder, plans, appraisal, borrower qualifications). Rate Lock & Closing: 1-2 weeks (finalize documents, wire funds, record deed). Construction Phase: 6-12 months (depends on home size, weather, material availability, inspection schedules). Final Inspection & Conversion: 2-4 weeks (final appraisal, certificate of occupancy, loan converts to permanent). Total timeline: 9-15 months from application to moving in. Bergen County considerations: Stricter building codes and inspection requirements may add 2-4 weeks. Winter weather (Nov-Mar) can delay construction by 1-3 months. Permit approval in premium towns (Alpine, Saddle River) can take 8-12 weeks vs 4-6 weeks elsewhere.
What happens if construction goes over budget?
If construction costs exceed the original budget, you have several options but must cover overages out-of-pocket. Loan funds are fixed at closing. If approved for $1.2M total ($1M loan + $200K down) and construction costs $1.3M, you must provide an additional $100K. Preventing cost overruns: Build 10-15% contingency into original budget ($90K-$135K buffer on $900K construction). Get fixed-price contracts from GC (not cost-plus which has unlimited upside). Lock material prices early (flooring, cabinets, fixtures, appliances). Avoid mid-construction changes (every change order adds 20-30% premium). Managing overruns if they occur: Use contingency fund first, negotiate with builder on non-essential upgrades, delay landscaping or finishing touches until after move-in, tap personal savings or HELOC on current home, request additional loan funds from lender (rare, requires re-approval and new appraisal). Typical overrun rate: 10-20% on average custom builds, 5-10% with experienced builders and fixed contracts.
Are construction loans available for teardowns and rebuilds in NJ?
Yes, construction-to-permanent loans can finance teardown-and-rebuild projects, common in Bergen County where older homes occupy premium lots. Teardown loan structure: Purchase existing home on desirable lot (or use equity from home you already own). Demolish existing structure ($15K-$35K demolition cost). Build new custom home on the lot. Loan covers: Land/existing home purchase price, demolition costs, new construction budget, soft costs (permits, architect, engineer). Example: $1.5M Alpine teardown project - $600K existing home purchase, $25K demolition, $875K new construction = $1.5M total. With 20% down ($300K), borrow $1.2M construction-to-permanent loan. Challenges: Higher down payment (25-30% vs 20% for vacant land builds), must prove demolition is worthwhile (new home value must exceed total project cost by 20%+), stricter appraisal requirements (based on future improved value). Popular teardown markets: Alpine, Saddle River, Franklin Lakes, Demarest, Englewood Cliffs. Older homes ($600K-$1M) on premium lots rebuild into $2M-$4M modern estates.