Loan Conversion: From Construction Loan to Permanent Mortgage

Overview

• Typical Duration: 2-4 weeks
• DIY Difficulty: ★★★☆☆ (3/5 - Paperwork intensive)
• Typical Cost: $0-$3,000 (depending on loan type)
• When to DIY: Document gathering, communication
• When to Hire: Mortgage broker (if having issues)

Converting your construction loan to a permanent mortgage is the final financial step in your owner-builder journey. Get this right and you'll have a manageable monthly payment. This guide walks you through the process.

When This Step Happens

• Must be complete first: Certificate of Occupancy received
• Can happen in parallel: Moving in, final cleaning
• What comes after: Regular mortgage payments, homeownership!

Understanding Loan Conversion

Two Scenarios

Scenario 1: Construction-to-Permanent Loan

• Single loan that automatically converts
• No second closing required
• Interest rate locked at initial closing
• Simpler and less expensive

Scenario 2: Construction-Only Loan

• Requires refinance to permanent mortgage
• Second closing with new fees
• Current market rates apply
• More flexible but more expensive

Construction-to-Permanent Conversion

The Automatic Conversion Process

How it works:

• Construction period: Interest-only payments
• After CO: Loan converts to standard mortgage
• Principal and interest payments begin
• Usually 30-year fixed mortgage

Timeline

Week 1-2: Pre-Conversion

• Submit Certificate of Occupancy to lender
• Lender orders final appraisal (if required)
• Final inspection by lender (to verify completion)
• Review final costs and loan amount

Week 2-3: Processing

• Lender processes conversion paperwork
• Final loan amount calculated
• Payment schedule generated
• Escrow account set up (if applicable)

Week 3-4: Activation

• Receive final loan documents
• Sign any required paperwork
• First mortgage payment scheduled
• Conversion complete

Required Documentation

What lender needs:

• [ ] Certificate of Occupancy (certified copy)
• [ ] Final cost breakdown (actual vs budgeted)
• [ ] Receipts and lien releases from all contractors
• [ ] Proof of homeowner's insurance
• [ ] Updated income verification (if required)
• [ ] Appraisal (if ordered)

Costs

Typical costs for construction-to-perm conversion:

• Final appraisal (if required): $400-$600
• Recording fees: $100-$300
• Escrow setup: $0-$500
• Document fees: $0-$200
• Total: $500-$1,600

Much less than new loan closing costs

Construction-Only Loan Refinance

The Refinance Process

This is essentially getting a new mortgage:

• Apply for mortgage loan
• Full underwriting process
• New appraisal required
• New closing with full fees
• Pay off construction loan with new mortgage

Timeline

Week 1-2: Application

• Shop for best mortgage rates
• Submit loan application
• Provide required documentation
• Lock interest rate (if desired)

Week 2-4: Underwriting

• Lender orders appraisal
• Verify income and employment
• Check credit
• Underwrite loan

Week 4-6: Closing

• Receive Closing Disclosure
• Review final numbers
• Schedule closing appointment
• Sign documents and pay closing costs
• Construction loan paid off

Required Documentation

Complete mortgage application requires:

• [ ] Certificate of Occupancy
• [ ] Proof of income (pay stubs, tax returns)
• [ ] Bank statements
• [ ] Final cost breakdown
• [ ] Homeowner's insurance
• [ ] Lien releases from all contractors
• [ ] Employment verification
• [ ] Credit check authorization

Costs

Full refinance closing costs:

• Appraisal: $400-$600
• Origination fee: 0.5-1% of loan ($1,000-$3,000)
• Title insurance: $1,000-$2,000
• Recording fees: $100-$300
• Credit report: $50-$100
• Underwriting fee: $300-$500
• Escrow setup: $500-$1,500
• Total: $3,350-$8,000 (1-3% of loan amount)

Appraisal Process

Why Another Appraisal?

Lender needs to verify:

• Completed value matches or exceeds loan amount
• Construction quality is acceptable
• No major defects or issues
• Home is marketable
• Loan-to-value ratio is acceptable

The Appraisal Visit

Appraiser will:

• Inspect entire house (interior and exterior)
• Measure square footage
• Photograph all rooms and exterior
• Note quality of finishes and construction
• Compare to similar homes (comps)
• Generate appraisal report

Typical timeline: Order to report = 1-2 weeks

Appraisal Issues

Problem 1: Appraisal Comes in Low

• Appraised value less than construction cost
• Loan-to-value ratio higher than allowed
• May need to bring extra cash to closing

Solutions:

• Challenge appraisal with better comps
• Get second appraisal (at your cost)
• Bring additional down payment
• Negotiate with lender on loan terms

Problem 2: Defects Noted

• Appraiser notes quality issues or defects
• May require repairs before loan approval
• Could affect loan amount

Solutions:

• Fix noted defects
• Provide documentation of quality (warranty info)
• Get contractor letter explaining items

First Mortgage Payment

When Payment Starts

Construction-to-Perm:

• First payment typically 30-45 days after conversion
• Example: Convert on March 15, first payment May 1

Refinance:

• First payment 30-45 days after closing
• Pays interest from closing date forward

Payment Calculation

Principal and interest example:

• Loan amount: $250,000
• Interest rate: 6.5%
• Term: 30 years
• Monthly P&I: ~$1,580

Plus escrow (if applicable):

• Property taxes: $200-$500/month
• Homeowner's insurance: $100-$300/month
• Total monthly payment: $1,880-$2,380

Verify payment amount is what you expected based on budget

Escrow Account

What it is:

• Account held by lender
• Pays property taxes and insurance
• You pay into it monthly
• Lender pays bills annually/semi-annually

Initial escrow deposit:

• 2-3 months taxes
• 2-3 months insurance
• Due at conversion/closing

Ongoing:

• Included in monthly payment
• Reviewed annually
• Adjusted if taxes or insurance change

Common Issues and Solutions

Issue 1: Conversion Delayed

Causes:

• Missing documentation
• Appraisal delayed
• Lender processing backlog
• Title issues

Solution:

• Submit all docs promptly
• Follow up weekly with lender
• Be responsive to requests
• Escalate to manager if needed

Impact:

• Extended construction loan interest
• Delayed interest rate lock (if refinancing)
• Stress and uncertainty

Issue 2: Income Verification Problems

Causes:

• Changed jobs during construction
• Self-employed with fluctuating income
• Took time off for construction

Solution:

• Explain circumstances to lender
• Provide documentation of stable income
• Show employment contract or offer letter
• Consider co-borrower if needed

Issue 3: Went Over Budget

Causes:

• Construction costs exceeded loan amount
• Unexpected expenses
• Changes and upgrades

Solution:

• Pay overages out of pocket before conversion
• Get lien releases for all work
• Document all expenses
• Verify final loan amount covers all costs

Issue 4: Inspection Reveals Issues

Causes:

• Lender's final inspection notes defects
• Unfinished items discovered
• Quality concerns raised

Solution:

• Fix issues immediately
• Get re-inspection
• Provide warranties/documentation
• Don't hide problems

Switching to Homeowner's Insurance

Construction to Homeowner's

During construction:

• Builder's risk policy covers construction
• Expires when construction complete

After CO:

• Need homeowner's policy
• Covers completed home
• Required by lender

Process

1. Contact insurance agent (2-3 weeks before CO) 2. Get homeowner's policy quote 3. Compare multiple quotes 4. Purchase policy to activate on CO date 5. Cancel builder's risk policy 6. Provide proof to lender

Important: No gap in coverage!

Cost Comparison

Builder's risk: $1,500-$3,000 (one-time during construction) Homeowner's: $1,200-$3,600/year (ongoing)

Higher if:

• Higher coverage amount
• More valuable contents
• Special riders (jewelry, etc.)
• Higher risk area (flood, fire)

Final Financial Reconciliation

Total Project Cost

Before conversion, calculate:

• [ ] Total construction costs
• [ ] Interest paid during construction
• [ ] All fees and closing costs
• [ ] Any cost overruns
• [ ] Final loan amount

Compare to original budget:

• Where did you come in under?
• Where did you go over?
• What were unexpected costs?
• What would you do differently?

Savings Achieved

Calculate your owner-builder savings:

• Estimated with GC: $XXX,XXX
• Actual cost: $XXX,XXX
• Savings: $XX,XXX
• Your sweat equity value: Priceless

Celebrate your achievement!

Quality Checkpoints

Before conversion/closing:

Documentation Ready:

• [ ] Certificate of Occupancy (certified copy)
• [ ] All contractor invoices and receipts
• [ ] All lien releases
• [ ] Proof of final costs
• [ ] Homeowner's insurance policy
• [ ] Income verification (if required)

Financial Ready:

• [ ] Understand final payment amount
• [ ] Escrow deposit funds available (if applicable)
• [ ] Closing costs saved (if refinancing)
• [ ] All construction bills paid
• [ ] No outstanding contractor payments

Property Ready:

• [ ] 100% complete
• [ ] Passed final inspection
• [ ] No defects noted in appraisal
• [ ] Utilities in your name
• [ ] Ready for lender final inspection

Budget for Conversion

Construction-to-Permanent:

• Final appraisal (maybe): $400-$600
• Recording fees: $100-$300
• Misc fees: $200-$700
• Total: $700-$1,600

Construction-Only Refinance:

• Full closing costs: $3,350-$8,000
• Overlapping interest: $500-$1,500
• Total: $3,850-$9,500

Budget for higher amount to be safe

Timeline Summary

Construction-to-Permanent:

• Submit CO: Day 1
• Lender processes: Days 1-14
• Appraisal (if needed): Days 5-15
• Conversion complete: Days 14-21
• First payment: Day 45-60

Construction-Only Refinance:

• Submit application: Day 1
• Underwriting: Days 1-21
• Appraisal: Days 5-15
• Closing: Days 28-42
• First payment: Day 60-75

What Comes Next

After loan conversion:

• Make monthly mortgage payments on time
• Budget for property taxes and insurance
• Maintain your home
• Enjoy the home you built!

Link to: Moving In

Related Resources

Ready to move in? Our moving-in checklist covers final preparation steps.

Want to track your project costs? See our budget tracking guide.