Construction-to-Permanent Loan: Rules by Program (2026)

How the single close works, step by step

This page is for the household that will live in the house. If you are an investor financing a spec home or a rental build, the product is different and the numbers are in our ground-up construction loan guide.

1. You close once, before anyone digs. The note for the permanent mortgage is signed at the same closing as the construction financing. Freddie Mac’s guide says the note and security instrument for the permanent financing “are executed at the time of closing for the Interim Construction Financing.”
2. The land is paid for first. If you do not own the lot, closing money buys it; the rest of the loan sits in an escrow, called a draw or loan-in-process account, and the lender pays the builder from it as work is finished. VA and FHA both require your written approval before each draw.
3. You pay interest only on what has been drawn, through a reserve or from your pocket depending on the program (USDA lets the reserve cover up to 12 months of payments).
4. Inspections gate the money. The lender, not you, manages the disbursements to the builder, contractor and suppliers (Fannie Mae’s guide), and under USDA’s program it must keep documentation that the work was done for each draw.
5. The loan converts. After the final inspection or certificate of occupancy the interim loan becomes the permanent mortgage automatically or by a modification, under the terms already in the documents. Fannie Mae will not buy the loan until that has happened.

Regulation Z lets the lender count this as one loan or two for disclosure purposes: “the construction phase and the permanent phase may be treated as either one transaction or more than one transaction” (12 CFR 1026.17(c)(6)(ii)). Both Fannie Mae and Freddie Mac require the construction phase to be a temporary loan that is exempt from Regulation Z’s ability-to-repay rule.

The five programs side by side

All cells below come from the rulebook named in the row, read on October 9, 2026. “Not stated” means the section we read does not say; it does not mean there is no rule elsewhere, and lenders add their own minimum scores on top of every program.

Money: down payment, credit score and fees

Rules: build time, owner-builder and rate

Two details in these tables surprise people. First, Freddie Mac’s guide lists Government Mortgages (FHA, VA, USDA) as ineligible for its own construction-to-permanent product, so a lender offering “FHA one-time close” is using HUD’s rulebook, not Freddie Mac’s. Second, a 12-month cap is often quoted as if it applied to every program; in the sources we saved it is explicit only for Fannie Mae single-closing loans and, in a different form, for VA’s payment postponement.

Who may build it: the owner-builder question

“Owner builder construction loan” is a common search and it has the least friendly answer. What each rulebook says:

• VA: “The Veteran may act as their own contractor or builder, and VA Builder ID is not required in these cases.” All labor and material costs must then be documented by receipts, work orders or contracts to set the price.
• Freddie Mac: the builder or developer must not be obligated on the interim financing “except when the builder/developer is the Borrower on the Permanent Financing and will occupy the Mortgaged Premises as their Primary Residence.”
• FHA: “The Borrower may act as the general contractor, only if the Borrower is also a licensed general contractor.” The borrower must otherwise have contracted with a licensed builder.
• USDA: “Contractors building their own residence are ineligible.”
• Fannie Mae: the three construction-to-permanent topics do not use the term. That is not a permission; it means the answer is in your lender’s overlay, so ask for it in writing before you buy the land.

In practice lenders add their own limits (a licensed contractor on the job, a track record, a fixed-price contract). USDA’s deck requires the lender to verify a builder with two or more years of construction experience, a state license where required and at least $500,000 of general liability insurance.

The rate: what you lock, and when

During the build the market moves. Freddie Mac’s weekly survey (PMMS) put the 30-year fixed average at 7.40% on October 8, 2026, up from 7.28% a week earlier and 6.30% a year earlier. We use it only as the permanent-rate benchmark; a construction-phase rate is set by each lender and no source we saved publishes one.

What a move like that costs on a permanent loan is easy to see. A $400,000, 30-year fixed loan has a principal-and-interest payment of $2,769.52 at 7.40% and $2,475.89 at 6.30%: $293.63 more a month, $105,706 over 360 payments (our arithmetic). That gap is what a locked rate protects, and what a float-down option can win back if rates fall. FHA and VA require that you can only float inside a written maximum and that you qualify at that maximum rate, so a float is not a free option: if the maximum is two points higher, the lender must be able to approve you at the higher payment.

If you do not lock at closing, ask four things in writing: the maximum permanent rate, the date or event that triggers the lock, whether you may lock lower if rates fall, and the fee for a lock extension if the build runs late.

What interest costs while you build: a worked example

The sources do not publish a typical construction-phase bill, so the table below is our arithmetic on a stated assumption. A $400,000 loan is drawn in nine equal monthly draws of $44,444 (a real schedule is lumpier, with a larger first draw if the lot is bought at closing). Interest is charged only on the balance drawn. We use 7.40%, the PMMS 30-year average of October 8, 2026, as a stand-in rate. This is an example, not a quote.

Interest during construction on $400,000 at 7.40% (our arithmetic, example only)

Two points follow. The schedule of draws moves the bill by about $2,500, but a late finish moves it by $7,400, so the lender’s extension terms matter more than the exact timing. And who pays differs by program: VA says the builder, not the veteran, is responsible for fees normally paid by a builder with an interim loan (inspection fees, title updates, hazard insurance), while the veteran may pay interest not covered by the interest reserve.

Draws, inspections and what happens when things go wrong

Draws and inspections. VA’s handbook puts the burden on the lender: “It is the lender’s responsibility to negotiate an inspection schedule with the general contractor, and it is the lender’s responsibility to ensure the schedule is followed.” FHA requires the borrower’s written authorization before each draw and, after completion, a title update showing no liens other than the mortgage. USDA’s deck says that when funds are disbursed the lender is warranting that the work was done as specified, and lists a final appraiser inspection, certificate of occupancy and a clear title policy at close-out.

Cost overruns. Fannie Mae allows the loan amount to rise before conversion only “to cover documented increased costs of construction.” Freddie Mac says the same. USDA lets a contingency reserve of up to 10% of construction cost be financed but says the borrower pays any change order that exceeds available loan funds. VA says change orders made after the appraisal cannot be mortgaged into the loan without an updated appraisal; you may pay for them out of pocket.

A low appraisal. The appraisal that matters is the “as completed” value. Fannie Mae divides the loan by the lesser of the purchase price (lot plus construction cost) or the as-completed appraised value, and Freddie Mac, FHA and VA all lend against the lesser of cost or value. If the post-construction update shows the value has declined, Fannie Mae requires a new appraisal and a new qualification at the updated LTV. Example (our arithmetic): a $500,000 project that appraises at $470,000 supports a 97% loan of $455,900 instead of $485,000, so you must find $29,100 more.

A late build. Fannie Mae cannot buy a single-closing loan whose construction period runs past its limits; it must be processed as a two-closing loan instead. VA keeps the loan alive for up to six more months of postponed payments.

Stale documents. Fannie Mae wants credit, income and employment documents no more than four months old at closing and again at conversion, unless conditions including an LTV of 95% or less are met, in which case documents up to 18 months old may be used at conversion. Freddie Mac allows up to 540 calendar days under conditions. A long build with a job change in the middle is the case to raise with the lender on day one.

One close versus two: what the second closing adds

In a two-closing loan the construction loan and the permanent loan are separate loans on separate papers. Fannie Mae says a new note must be signed; a modification cannot update the original. The permanent loan is treated as a limited cash-out or cash-out refinance, and a cash-out refinance requires that you held title to the lot for at least six months. Freddie Mac’s two-time close also uses separate instruments and a refinance classification. VA’s two-time loan means the interim loan is not a VA loan and the VA loan only exists afterwards, and USDA’s own deck pitches the single close on the grounds of “only 1 loan closing (& 1 set of loan closing costs).”

Rulebooks do not publish the dollar cost of a second closing, so we cannot give you one from a source. What they do show is where it comes from: a second set of closing documents, a second qualification at today’s rate, and the risk that your income, credit or the house’s value has changed when you convert. If you choose two closings, ask the lender to itemize title, appraisal, recording and underwriting fees for each closing next to the one-close quote.

What you can do with this

1. Pick the program by your situation, not by the rate. Veteran: VA allows the widest owner-builder rule. Buying in a USDA-eligible area: USDA is the only one of the five that presents itself as a no-down-payment product. Everyone else: Fannie Mae and Freddie Mac conventional at 3% to 5% down, or FHA at 3.5% with a credit score of 580 or higher.
2. Ask each lender five questions in writing: the maximum permanent rate and lock trigger, the longest construction period it will sign, its own minimum credit score for construction loans, whether it allows you to be your own contractor, and what it charges if the build runs past the period.
3. Run the low-appraisal test before you sign. Take 97% of an appraisal 6% below your cost and see whether you have the cash for the gap.
4. Check the draw schedule against the builder’s contract. Ask who inspects, how many days a draw takes and whether the lender needs a lien waiver each time.
5. Do not rely on this page for your own file. Rulebooks change; Freddie Mac’s Section 4602 already has a version effective November 2, 2026.

FAQ

Rules read October 9, 2026 from the Fannie Mae Selling Guide (B5-3.1-01, -02, -03, B3-5.1-01 and the Eligibility Matrix of August 5, 2026), the Freddie Mac Seller/Servicer Guide (Sections 4602.1 to 4602.3, effective 06/03/2026), HUD Handbook 4000.1 (the posted PDF, section II.A.8.j last revised 08/14/2019), the VA Lender’s Handbook Chapters 7 and 8 (Topic 2 changed June 5, 2024), a USDA Rural Development training deck of January 2024 on HB-1-3555 Chapter 12 Section 6 and 12 CFR 1026.17; the rate is Freddie Mac’s PMMS of October 8, 2026. Interest and appraisal figures are our arithmetic on stated assumptions. Official handbooks can be newer than the copies we read. This is analysis of public records, not investment, legal, lending or tax advice.