Yes, you can refinance a construction loan, and in most cases you’re expected to. Construction loans are short-term instruments, typically running 12 to 18 months at variable rates about a percentage point above standard mortgage rates. Once the home is finished and passes inspection, that expensive short-term debt gets replaced by a 15- or 30-year mortgage at a lower rate. How that conversion actually happens depends on which type of construction loan you signed at the start.
Which Type of Construction Loan You Have
Pull out your original loan documents before doing anything else. The path to a permanent mortgage was set the day you signed.
Single-Close (Construction-to-Permanent)
A single-close loan bundles both phases into one transaction. You signed once, paid one set of closing costs, and the loan converts automatically from a construction line of credit to a permanent mortgage after the lender confirms the home is complete. Your permanent rate, repayment term, and monthly payment were all locked in at the original signing. There’s no second application, no second appraisal ordered from scratch, and no second round of closing costs, which matters because closing costs generally run 2% to 5% of the mortgage amount.1Fannie Mae. Closing Costs Calculator
Two-Close (Standalone Construction)
A two-close transaction means you took out a standalone construction loan with no permanent financing attached. When the home is done, you apply for a completely separate mortgage to pay off the construction debt. New application, new appraisal, new closing costs, fresh credit check. The upside is flexibility: you shop for the best available rate at the time of conversion rather than committing months in advance. Fannie Mae also allows documented construction cost overruns to be rolled into the permanent loan amount on a two-close deal, as long as those overrun payments go directly to the builder at closing.2Fannie Mae. FAQs: Construction-to-Permanent Financing
Locking Your Rate Before Conversion
If you have a single-close loan, your permanent rate was set at the original signing and this section doesn’t apply. If you’re heading into a two-close conversion, timing matters.
Some lenders offer extended rate locks that hold the permanent mortgage rate for anywhere from 120 to 360 days while the home is being built. These carry a fee, though a portion may be credited back toward closing costs if the loan closes on time. Certain programs include a one-time float-down option that lets you take a lower rate if the market drops before your closing date.
Extended locks are most useful in a rising-rate environment. If rates are falling, the two-close approach can work in your favor because you set the permanent rate closer to the actual conversion date. The risk runs the other way too.
What You Need to Qualify
Qualifying for the permanent mortgage means meeting the same benchmarks as any home loan, with a few construction-specific twists.
Credit Score
Most conventional lenders want a score of at least 680 for a construction-to-permanent refinance, and scores above 720 pick up the most competitive rates. FHA construction loans accept scores as low as 580, or 500 with a larger down payment. VA loan credit floors are set by individual lenders rather than a single national minimum.
Debt-to-Income Ratio
For conventional loans sold to Fannie Mae, the maximum DTI is 36% for manually underwritten loans, though strong credit and cash reserves can push that up to 45%. Loans processed through Fannie Mae’s automated underwriting system allow ratios as high as 50%.3Fannie Mae. B3-6-02, Debt-to-Income Ratios The calculation includes your projected mortgage payment, property taxes, homeowners insurance, and every other recurring debt.
Loan-to-Value and Equity
For a straight rate-and-term refinance — converting construction debt to a permanent mortgage without pulling out cash — Fannie Mae allows LTV ratios up to 97% on a single-unit primary residence.4Fannie Mae. Limited Cash-Out Refinance Transactions Anything above 80% triggers private mortgage insurance, which adds to your monthly payment.5Fannie Mae. Mortgage Insurance Coverage Requirements
For a cash-out refinance, where you borrow more than the existing construction balance to cover landscaping, upgrades, or other costs, the LTV cap drops to 80% on a single-unit primary residence and 75% on multi-unit properties, second homes, or investment properties.6Fannie Mae. Eligibility Matrix Most borrowers hit the equity requirement through their original land and construction down payment plus any appreciation during the build.
FHA and VA Paths
If conventional numbers don’t work, government-backed programs may.
The FHA one-time close construction loan converts to a permanent FHA mortgage. Minimum 580 credit score with 3.5% down, or as low as 500 with 10% down. The trade-off is mandatory mortgage insurance: an upfront premium of 1.75% of the loan amount at closing plus an annual premium between 0.15% and 0.75% depending on term, amount, and LTV. On loans longer than 15 years with a starting LTV above 90%, the annual premium lasts the life of the loan rather than dropping at 20% equity the way conventional PMI does.
VA one-time close loans cover both phases in a single transaction with no down payment required for eligible veterans and active-duty service members.7Veterans Affairs. VA Circular 26-18-7, Construction-to-Permanent Financing The builder handles interest during construction; the borrower’s payments start when the home is done. No PMI, but there is a one-time VA funding fee tied to down payment and whether it’s your first use of the benefit. Veterans holding a non-VA construction loan can also use a VA cash-out refinance to convert it into a VA-backed permanent mortgage.8Veterans Affairs. Cash-Out Refinance Loan
Documents to Have Ready
You’ll be pulling together two stacks of paper: standard mortgage documents and construction-specific ones.
On the financial side, expect to complete a Uniform Residential Loan Application detailing income, assets, and debts.9Fannie Mae. Uniform Residential Loan Application Recent pay stubs, two years of W-2s, bank statements, and federal tax returns. Self-employed borrowers should be ready with profit-and-loss documentation.
On the construction side, two documents matter most. The Certificate of Occupancy, issued by the local building department, confirms the home passed all required inspections and is legally habitable. Without it, no lender will fund a permanent mortgage. Final lien waivers, signed by the general contractor and every subcontractor, confirm they’ve been paid in full and give up any right to lien the property. Collect waivers at the time of final payment, not later. Together, the Certificate of Occupancy and lien waivers tell the lender the title is clear.
The lender will also order a final appraisal to confirm the completed home matches the value projected at the start. In some cases the lender will accept an appraisal update and completion report instead of a new appraisal from scratch, letting the appraiser verify the home was built to plan through either an on-site visit or a virtual inspection.10Fannie Mae. Requirements for Verifying Completion and Postponed Improvements
Swapping Builder’s Risk for Homeowners Insurance
During construction, the property was covered by a builder’s risk policy protecting the structure and materials on site. Before closing on the permanent mortgage, you have to replace that policy with a standard homeowners policy. The Certificate of Occupancy is usually the trigger for the switch.
Most lenders require homeowners coverage equal to the full rebuilding cost of the home, not the market value or the loan amount, and proof of coverage must be in hand at or before closing. Getting a new policy issued and canceling the builder’s risk policy can take a few weeks, so start with your insurance agent early.
Closing Timeline and the Payment Change
Once you submit the completed application and supporting documents, underwriting generally runs 30 to 45 days. The team verifies the Certificate of Occupancy, lien waivers, appraisal, and your current financial profile, and may ask for updated pay stubs or bank statements. A title search confirms no mechanics’ liens, judgments, or other encumbrances have been filed against the property.
After the underwriter issues a clear-to-close decision, you schedule closing. The new mortgage funds are sent to the construction lender to pay off the short-term debt, and the permanent mortgage is recorded as the first-priority lien. A final walkthrough is often done shortly before closing. Once the documents are signed and the deed is recorded, monthly payments begin on the permanent loan.
Those payments will feel different. During construction, most borrowers made interest-only payments based on the amount drawn so far, not the full loan balance, and those payments started small and grew as the builder drew more funds.11Consumer Financial Protection Bureau. TRID Rule: Combined Construction Loan Disclosure Guide The permanent mortgage is fully amortizing: principal and interest together. Even at a lower rate, the monthly number usually jumps. Someone paying $1,200 in interest-only payments on a $400,000 draw might see a permanent payment of $2,200 or more. Budget for this before the conversion, not after.
If Construction Runs Late
Your construction loan has a hard maturity date. If the home isn’t finished when the loan expires, the lender may agree to an extension, but extensions require a signed loan modification and come with extension fees plus continued interest charges. Multiple extensions compound the cost.
If extensions are exhausted or the lender declines, the loan can go into default and eventually foreclosure. Some borrowers avoid that by lining up short-term bridge financing from a different lender, provided enough equity sits in the partially completed property. The better protection is building a realistic timeline with your contractor at the start and holding a cash reserve for delays.
Refinancing Before Construction Is Finished
Refinancing mid-build is possible but uncommon. It usually comes up when rates drop sharply or cost overruns push the project past the original loan amount. The lender will order a progress inspection to estimate the current value of the partially built structure, and the new loan has to cover both the existing balance and the remaining costs to finish.
Lenders willing to do this generally require a revised builder budget, an updated timeline, and a contingency reserve of 5% to 10% of total project cost built into the loan. Because the collateral is an unfinished building, expect tighter underwriting, a higher rate, and fewer lenders willing to participate than you’d see with a standard post-completion refinance.
Tax Treatment
Interest paid on a construction loan can be deductible if the loan is secured by the property and the home qualifies as your main or second residence. The IRS treats a home under construction as a qualified home for up to 24 months, but only if it actually becomes your residence once ready for occupancy.12Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction For 2026, the deductible mortgage interest limit for home acquisition debt has reverted to $1 million ($500,000 if married filing separately), following the expiration of the temporary $750,000 cap in effect from 2018 through 2025.
When the construction loan is refinanced into a permanent mortgage, the new debt is treated as home acquisition debt, but only up to the remaining principal balance of the old loan at the time of refinancing. Any amount borrowed above that balance, as with a cash-out refinance, is subject to separate rules.12Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Points work differently on a refinance than on a purchase. Points paid to buy or build a main home can generally be deducted in full in the year paid. Points paid to refinance must be spread out and deducted over the life of the new loan.13Internal Revenue Service. Topic No. 504, Home Mortgage Points