What is a Construction-to-Permanent Loan?

A construction-to-permanent loan, otherwise known as a C2P loan, is a type of loan that gives landowners flexible financing access when building a new home. Existing homeowners can also use a C2P loan to finance a renovation or home remodeling project. When the construction is complete, the loan balance is rolled or converted into a traditional mortgage.

The best thing about construction-to-permanent loans in Phoenix is they include two different loans — a construction loan and a home mortgage. As a result, there is only one closing cost when the home is built, saving you money. However, only one-unit, single-family homes qualify for a construction to permanent loan.

Affordable, Flexible Mortgage Financing

Compared to other financing options for home construction projects, C2P loans are a viable option for owning your dream home in Phoenix. Many homeowners and intending homeowners in Arizona turn to this option because of the flexibility it offers.

Construction-to-permanent loans are better than stand-alone construction loans since you can merge the construction and mortgage loans into one. Stand-alone construction loans, on the other hand, give you a single financing plan, which will only cover the construction costs. When the house is complete, you’ll still have to apply for a traditional mortgage.

With a C2P loan, you can lock in your interest rate while you buy land and build your dream home with as little as a 5% down payment. While the majority of home loans lenders may request a low down payment for C2P loans, some lenders demand as high as 20-30%.

How Do Construction-to-Permanent Loans Work?

For many people looking to obtain a construction loan, the first and major challenge is knowing what the process actually entails. While it is very confusing to many, securing construction loans is not really different from traditional mortgages.

Depending on your lot location, the steps may vary slightly from regulations in other areas. For landowners and homeowners in Phoenix, the process of securing a C2P loan in Phoenix is outlined below:

Application Stage

You will need to find a reputable builder and speak with a mortgage professional about the best financing options available. Most lenders will ask to see your construction plans and building contract before approving your loan.

They will review your income, assets, debts, and credit card usage. Generally, you need a good credit score to secure a C2P loan in Phoenix and the following credit history requirements:

  • 95% LTV – Up to $850K – 720 FICO
  • 90% LTV – $850K to $1MM – 720 FICO
  • 85% LTV - $1,000,001 to $1.5MM – 740 FICO

The lender may also request a property appraisal if you’re doing a renovation, which will also help to determine your mortgage rates. Once you learn and finalize the loan details, you can sign the loan documents and begin construction.

The Construction Phase

During the construction phase, the lender will release several different kinds of funds to your builder as you progress through different stages of the construction.

  • Disbursements and inspections. Your lender will schedule an inspection of the work done by the builder before your lender disburses funds to reimburse for materials used and work completed.
  • Construction Draws: Following the inspection of the work completed, the builder draws periodically from the construction loan provided by your lender. Most lenders generally release funds within 2-3 business days.
  • Mortgage Payments: During the construction phase of your C2P loan, your lender will bill you monthly for interest, which means you will pay interest-only payments until the project is completed. This will be calculated based on the amount of funds the lender disburses per time to your builder for completed work.

    You cannot make any principal payments on the loan amount until construction is complete. Also, depending on the location of your lot, the lender may request that you pay for property insurance, such as a flood insurance premium, along with your interest payment.

Moving Your Construction Loan to a Permanent Mortgage

As you settle into your new home, your construction-to-permanent loan will be converted to a permanent or traditional mortgage. Since a loan conversion will already be in place for a construction-to-permanent loan, you will not need to shop for a new mortgage. From this point on, you pay a fixed rate interest on the mortgage that may extend for as long as 30 years, depending on the initial terms of the loan.

Our Team Can Advise You on the Right Loan Type

We understand the home loan process can be overwhelming when there are numerous finance options to choose from. Our Highly-Motivated Vercellino team is ready and willing to answer any questions you have about construction-to-permanent loans and help you discover whether it is the best loan for your family.

You can always call our Phoenix office at 480.800.8387 to speak with a home loan expert anytime. Their goal is to show you the types of mortgage loans available and listen to your home ownership goals so they can pair you with a personalized loan option.

They are passionate about earning your trust and advising you through the homebuying process from start to finish.