How it works...
A Construction-Permanent mortgage or CP, is a Conventional loan that combines a Construction loan with a Permanent loan. The loan is processed and underwritten, upfront. An appraisal is performed and value reached, based upon the plans, specs and cost breakdown provided by the builder or owner. The interest rate for the permanent loan is locked during the early process and, in some cases, during the construction phase.
Once the loan is approved and closed, the construction period begins, which usually runs from 6 to 12 months. Interest payments are made during the construction phase. These are typically based on the locked permanent loan rate or on a short-term, temporary floating rate. Borrowers only pay interest on funds that are drawn from the construction account and disbursed to the builder.
An average Construction-Perm has 6 draws available during construction. Prior to the release of each draw, the lender or title agent will check for any liens or notices to owner affidavits. The builder will be required to prove that his/her bills are being paid timely and no liens are filed and that he/she is not delinquent on any invoices related to the subject property. Once that has been verified, the draw funds are released.
Once the home is complete and the lender has received the required final documents, such the Certificate of Occupancy, Final Lien Waivers, Final Survey, Insurance updates, etc., the CP transitions into the permanent loan and full PITI payments commences within a month or two afterward.