construction loan

A construction-to-permanent loan, often abbreviated as CTP or CP loan, is a type of financing used in real estate and construction projects. It is a two-in-one loan that combines the features of a construction loan and a traditional mortgage or permanent loan, allowing borrowers to finance both the construction and the eventual purchase of a newly built home or property.

Here’s how a construction-to-permanent loan typically works:

1. Construction Phase: During the construction phase, the borrower obtains funds to pay for the costs associated with building a new home. These funds can cover expenses such as materials, labor, permits, and construction-related fees. The loan is typically interest-only during this phase, meaning the borrower only pays interest on the amount disbursed for construction.
2. Transition to Permanent Loan: Once the construction is complete, the loan automatically transitions into a permanent mortgage. This transition is seamless and avoids the need for the borrower to apply for a separate mortgage loan once construction is finished. The interest rate may be fixed or adjustable, depending on the terms of the loan agreement.
3. Permanent Mortgage Phase: In this phase, the borrower begins making regular monthly payments that include both principal and interest. The terms of the permanent mortgage, such as the interest rate and repayment period, are established at the beginning of the loan and remain the same throughout the life of the loan.

Construction-to-permanent loans offer several advantages:

1. Simplified Process: It streamlines the financing process by combining construction and permanent financing into one loan, reducing paperwork and administrative hassle.
2. Interest Savings: During the construction phase, borrowers only pay interest on the funds disbursed for construction, potentially saving money compared to a traditional mortgage where interest accrues on the entire loan amount from the start.
3. Rate Lock: Borrowers can lock in the interest rate for the permanent mortgage at the beginning of the loan, protecting them from potential rate increases during construction.
4. One Set of Closing Costs: Since it’s a single loan, borrowers typically incur only one set of closing costs, saving money compared to two separate loans.
5. Flexible Terms: Construction-to-permanent loans can offer various term options and can be tailored to the borrower’s needs.
6. Time Sensitive: The construction loan is timed for a twelve-month period and begins at time of closing the loan. Presently it is taking between 18 and 24 months to complete a home from the initial signing of the contract. The construction loan can be extended; however, the terms of the loan may change to current interest rates.
7. Cost Over Runs: Any additional costs not included in the contract sum will be due at closing if not detailed in the contract. Things like utilities, required fill for the lot and environmental issues (wild life). If there is an escalation clause in the contract and it is exercised, those funds will be due at closing. The customer will either have to bring additional funds at closing or renegotiate the loan and borrow additional funds.

It’s important to note that these loans typically require a detailed construction plan, a qualified builder or contractor, and inspections at various stages of construction to ensure that the work is progressing as planned.

Interest rates, fees, and terms for construction-to-permanent loans can vary among lenders, so borrowers should carefully review loan offers and consult with financial professionals to determine if this type of financing is suitable for their specific project and financial situation.