What Construction-to-Permanent Financing Means
Construction-to-permanent financing lets you build a new home and convert your construction loan into a permanent mortgage once the house is finished. Think of it as a two-step process that can happen with either one closing or two separate closings.
Say you want to build a custom home on a lot you already own. You get a construction loan to pay the builder, then once the house is complete, that construction loan converts to a regular 30-year mortgage. The alternative would be getting a construction loan, paying it off when the house is done, then applying for a completely separate mortgage — which means more paperwork, more fees, and more hassle.
You can structure this financing in two ways. A one-closing transaction means you sign all the paperwork upfront and the loan automatically converts when construction finishes. A two-closing transaction means you close on the construction loan first, then close again on the permanent mortgage when the house is ready.
Property Requirements You Must Meet
You must own the lot before construction begins. You can buy the lot separately ahead of time, or purchase it as part of the construction-to-permanent transaction. Either way, the deed needs to be in your name when construction starts.
The property type matters for eligibility. Detached single-family homes qualify without issue. Detached units in condo projects also work, including manufactured homes placed in condo developments. However, attached condo units and all co-op properties are off-limits for this type of financing.
All construction work must be 100% complete before your lender can sell the loan to Fannie Mae. This includes not just the main house, but any work that could trigger mechanic's liens — things like electrical, plumbing, HVAC, and landscaping if it was part of the original contract.
Required Documentation and Inspections
Your lender must obtain a Form 1004D appraisal or an acceptable completion alternative that shows the finished property. This appraisal happens after construction is done, not during the building process.
If your loan covers both buying the lot and building the house, the lender needs a certificate of occupancy from your local building department. This proves the house meets all building codes and is safe to live in.
The lender must also verify that all mechanic's liens and materialmen's liens have been satisfied. These are legal claims that contractors, suppliers, or workers can file if they don't get paid. Your builder should provide lien waivers from all subcontractors and suppliers showing they've been paid in full.
Mortgage Documentation Rules
Your lender must use Fannie Mae's standard mortgage documents for the permanent loan. They cannot modify these documents to reference the construction phase, except for specific changes that Fannie Mae requires.
This rule exists because Fannie Mae purchases the permanent mortgage, not the construction loan. The construction phase is considered temporary financing that gets replaced by a standard mortgage once the house is finished.
Why These Rules Exist
Fannie Mae's requirements protect both you and the mortgage investors who ultimately buy these loans. The completion requirements ensure you're not stuck with a permanent mortgage on an unfinished house. The lien requirements protect against contractors who might claim they're owed money and try to force a sale of your property.
The property type restrictions reflect risk management. Attached condos and co-ops involve shared ownership structures and HOA dependencies that add complexity to construction projects. Detached homes give you more control over the building process and fewer variables that could go wrong.
Common Problems That Can Derail Your Loan
Construction delays are the biggest risk. If your house isn't finished by the time your construction loan expires, you might need to extend the loan or find bridge financing. Weather, permit delays, or contractor problems can all push back your completion date.
Lien issues can also create problems. If a subcontractor claims they weren't paid, they can file a mechanic's lien even if you paid the general contractor. Make sure your builder provides lien waivers from everyone who worked on the project.
Cost overruns present another challenge. If construction costs more than expected, you might need additional financing to complete the project. The permanent mortgage amount is typically set based on the original construction budget and appraised value.
Some lenders struggle with the Desktop Underwriter data entry for construction-to-permanent loans. The system needs specific information about both the construction phase and the permanent financing, and incorrect data entry can cause approval delays.
References
For the official guidelines, see B5-3.1-01: Conversion of Construction-to-Permanent Financing: Overview in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Fannie Mae Guideline Text
B5-3.1-01, Conversion of Construction-to-Permanent Financing: Overview (06/04/2025)
Conversion of Construction-to-Permanent Financing Overview
Uniform Appraisal Dataset (UAD) 3.6 Policy
Conversion of Construction-to-Permanent Financing Overview
The conversion of construction-to-permanent financing involves the granting of a long-term mortgage to a borrower for the purpose of replacing interim construction financing that the borrower has obtained to fund the construction of a new residence.
Construction-to-permanent financing can be structured as a transaction with one closing or a transaction with two separate closings. The borrower must hold title to the lot, which may have been previously acquired or be purchased as part of the transaction.
All construction work, including any work that could entitle a party to file a mechanic's or materialmen’s lien, must be completed and paid for, and all mechanic's liens, materialmen’s liens, and any other liens and claims that could become liens relating to the construction must be satisfied before the mortgage loan is delivered to Fannie Mae. The lender must retain in its individual loan file a Form 1004D or a completion alternative of the completed property. When a construction-to-permanent mortgage loan provides funds for acquisition or refinancing of an unimproved lot and the construction of a residence on the lot, the lender must retain a certificate of occupancy or an equivalent form from the applicable government authority.
The lender must use Fannie Mae's uniform mortgage instruments to document the permanent mortgage. These documents may not be altered to include any reference to construction of the property, other than any alteration that Fannie Mae specifically requires.
Attached units in a condo project and all co-op properties are ineligible for construction-to-permanent financing. Detached units in condo projects are permitted for construction-to-permanent financing, including manufactured homes in a condo project (subject to applicable project review requirements).
For guidance on data entry for construction-to-permanent transactions in DU, see the related Desktop Underwriter Job Aid.
Uniform Appraisal Dataset (UAD) 3.6 Policy
Lenders using UAD 3.6 must follow the requirements in the UAD 3.6 Policy Supplement .
