The benefits of a construction-to-permanent loan include single closing costs, locked-in interest rates, and less paperwork. Borrowers save $4,200-$6,500 by avoiding unnecessary closing costs when they take multiple loans. In 2023, according to Mortgage Bankers Association data, homeowners utilized construction-to-permanent loans to save approximately 1.2% of the overall loan amount on closing costs from homeowners who obtained individual loans. According to Mike Fratantoni, Mortgage Bankers Association Chief Economist, The main benefit of construction-to-permanent financing is locking in your permanent mortgage interest rate prior to commencing construction, which brings a huge sense of relief during the 6-12 month construction period in today’s rate volatility regime.

There are traditional, FHA, VA, and USDA construction-to-permanent loans. Construction-to-permanent loans have 68.3% market share with 582,450 loans originated during 2023, and government-backed has the other 31.7%, with FHA at 15.2% (129,350 loans), VA at 11.8% (100,300 loans), and USDA at 4.7% (39,950 loans). Statistical information from ICE Mortgage Technology shows that conventional construction-to-permanent loans have a mean loan amount of $427,500, compared to $316,200 for FHA, $392,750 for VA, and $285,300 for USDA loans. As noted by ex-FHA Commissioner and ex-CEO of the Mortgage Bankers Association David Stevens, Government-backed construction-to-permanent loans have made home building an option for veterans, rural families, and middle-class families to build houses with the same benefits they would receive if they were purchasing existing homes.

The typical interest rates on construction-to-permanent loans are 0.5% to 1% over typical mortgage rates, with recent averages ranging from 7.25% to 8.5% depending on loan type and borrower qualifications. As of March 2024, lenders averaged a rate premium of 0.72% for construction lending, with conventional construction loans at 7.62%, FHA construction loans at 7.88%, VA construction loans at 7.35%, and USDA construction loans at 7.95%. Freddie Mac current data shows the gap between customary mortgages and building financing has expanded by 0.15% since 2022 due largely to higher risk appraisals in new homes. According to Barry Habib, creator of MBS Highway and mortgage industry thought leader, construction-to-permanent loans typically carry higher interest rates because lenders are exposed to more risk during construction, with no completed collateral and market conditions potentially changing before final completion.

A greater down payment is typically required for a construction-to-permanent loan, as most lenders require minimum down payments of 20-25% compared to the accepted 3-5% minimum for conventional home mortgages. 2023 loan origination analysis shows the average down payment on construction-to-permanent loans averaged 24.3% ($103,290 on a $425,000 project), a much higher average than the national average down payment of 13.5% for existing home purchases. Federal Reserve data indicates that 76% of construction-to-permanent loans made in the last two years required down payments of 20% or higher, while only 42% of traditional home loans required the same. As noted by Susan Wachter, Professor of Real Estate, Wharton School of Business, University of Pennsylvania, The increased down payments on construction loans are a consequence of the extra risks involved in constructing a house, such as cost overruns, delays in construction, and the fact that the value of the finished house may not coincide with initial estimates.

680 is the minimum credit score that will qualify for a construction-to-permanent loan, although 700 or higher may be required by some lenders to qualify for the best rates. 2023 approval statistics analysis of construction-to-permanent loans proves that the accepted construction-to-permanent loan borrowers’ credit score was 732 on average, while conventional construction loans corresponded to an average FICO score of 742, FHA construction loans to 688, VA construction loans to 709, and USDA construction loans to 693. ICE Mortgage Technology statistics prove that only 12.3% of approved construction-to-permanent loans were awarded to borrowers with credit scores below 680, compared to 28.7% of average mortgage approvals. As pointed out by Greg McBride, Bankrate’s Chief Financial Analyst, construction lenders have stricter credit requirements because they’re not just looking at your ability to make monthly payments but your capability to see a complex building project through to its end despite the possibility of unexpected setbacks and expenses.

The construction-only loan is differentiated from the construction-to-permanent loan by the fact that the former automatically becomes a mortgage once building is done, while the latter requires securing a standalone permanent mortgage. Construction-only loans offer 12-18 month durations at a median interest rate 0.25-0.50% less than construction-to-permanent ones, but require borrowers to qualify and pay closing costs twice over, meaning an average of $5,850 in additional costs. Industry data in 2023 reveal that 68% of new home construction projects used construction-to-permanent lending and 32% used construction-only loans with permanent financing obtained later. Construction-only loans, according to Mark Zandi, Chief Economist at Moody’s Analytics, can have slightly lower initial rates but expose borrowers to a great deal of risk if mortgage rates rise during construction or if their financial situation changes, rendering them unable to qualify for permanent financing once construction is complete.