You close on a construction loan before any building starts — typically 30 to 60 days after you apply, once the lender has signed off on your finances, your builder, and the plans. Whether you close a second time depends on the loan structure you chose. A single-close construction-to-permanent loan converts automatically to a standard mortgage when the home is finished, with no second closing. A two-close loan requires a separate closing on a brand-new permanent mortgage after the certificate of occupancy is issued, usually 12 to 18 months after the first one.
The First Closing: What Triggers It
The initial closing is the event that authorizes construction to begin. It doesn’t happen on a fixed date after application; it happens once the lender has everything it needs to feel confident lending against a house that doesn’t exist yet. For most borrowers that takes 30 to 60 days, though complex custom builds can run longer.
Three approvals gate the closing date: your finances, the builder, and the project itself. On your side, the lender collects the usual mortgage documentation — tax returns, pay stubs, bank statements, debt disclosures — plus confirmation you can cover a down payment of 20% to 25% of the projected completed value. That’s well above the 3% to 5% some conventional mortgages allow, and it reflects the extra risk of lending on an unbuilt home.
The builder is vetted separately. You’ll typically need to show current licensing, adequate liability insurance, and sometimes a track record of completed projects. Finalized blueprints and a detailed cost breakdown go to the lender so it knows exactly what’s being built and for how much.
Then comes the “as-completed” appraisal, which sets the ceiling on your loan amount. Federal banking guidance limits construction loans for one- to four-family homes to 85% of the appraised value, so most lenders cap the loan-to-value ratio at 80% to 85%.1Federal Reserve. FAQs on the Calculation of Loan-To-Value Ratio for Real Estate Loans
Two more items have to be in hand before the closing date is set: building permits, and clear title to the land. The land needs to already be in your name or be purchased at the same closing, and title work must confirm no undisclosed liens. Once every piece is assembled, the lender issues the closing disclosure and puts a date on the calendar.
What Actually Happens at the Initial Closing
The closing itself takes place at a title company or attorney’s office. You sign the promissory note and the mortgage (or deed of trust). Together those documents create the legal obligation to repay and pledge the property as collateral. The lender’s security interest gets recorded in public records that day, giving it priority over any later claims against the property.
The loan agreement you sign also lays out how the money will actually reach the builder: the draw schedule, the inspection requirements, and what counts as a default. Loan funds go into a construction escrow account, and the builder pulls from it in stages as work is completed.
Closing costs come due at this stage. They typically run 2% to 5% of the loan amount and include origination fees, title insurance, appraisal fees, and recording charges.2Fannie Mae. Closing Costs Calculator If the land purchase is being folded in, that cost is due at the same time.
One insurance requirement catches some borrowers off guard: builder’s risk coverage must be in place before closing. Standard homeowner’s insurance won’t cover a home under construction — the gaps around weather, theft of materials, and job-site fire are too big. Builder’s risk policies cover the structure and materials for the length of the build and are typically required to equal at least 100% of the completed home’s value.
The Second Closing (Or No Second Closing at All)
What happens after construction depends entirely on which loan structure you picked at the beginning. The choice is made at the first closing, not the last, so it’s worth understanding both before you sign anything.
Single-Close: One Closing, One Conversion
A construction-to-permanent loan uses a single set of closing documents signed before construction begins. Those documents contain the terms for both the construction phase and the permanent mortgage that follows. When the home is finished, the loan converts to a standard amortizing mortgage without a second full closing.
Fannie Mae permits this conversion to happen two ways: through a rider attached to the original mortgage that makes the construction terms expire automatically, or through a separate modification agreement that formally converts the loan to permanent financing.3Fannie Mae. Conversion of Construction-to-Permanent Financing: Single-Closing Transactions Either way, the interest-only construction payments shift to regular principal-and-interest payments, and you don’t pay a second round of closing costs. If construction finishes early or late, the lender adjusts the amortization start date.
The savings on closing costs are real. You avoid a second set of origination fees, title insurance, and appraisal charges. The trade-off is that your permanent mortgage rate is locked in before construction starts, so you’re betting on where rates will be 12 to 18 months out. Some lenders offer extended rate locks of up to a year, though longer locks may cost more.
Two-Close: A Second Full Closing After Completion
In the two-close model, the construction loan and the permanent mortgage are entirely separate transactions. After the home is finished, you pay off the construction loan with a brand-new permanent mortgage, which means going through underwriting, appraisal, and closing all over again.
That second closing carries a full set of costs, typically 2% to 5% of the new loan amount, on top of what you paid at the first closing.2Fannie Mae. Closing Costs Calculator Start the permanent loan application 60 to 90 days before the anticipated completion date. Construction timelines are imprecise, and you don’t want to be shopping for financing after the last nail is driven.
The advantage is flexibility on the permanent rate. You shop when the home is nearly done, at current market rates, rather than committing before the first shovel hits dirt. If rates drop during the build, you benefit. If they rise, you absorb the cost, but you make the call with current information.
What Has to Happen Before the Loan Converts or Re-Closes
Neither the automatic conversion nor the second closing can happen until the local building authority issues a certificate of occupancy confirming the home meets code and is safe to live in. The final construction draw — typically the smallest — is also held back until that certificate is issued. Once it’s in hand and punch-list items are complete, the construction phase officially ends and the permanent financing takes over.
When Delays Push the Closing Back
Most construction loans have a term of 12 to 18 months. If the build isn’t finished by then, the final conversion or second closing can’t happen on schedule, and you’ll need an extension from the lender. Extensions typically involve administrative fees and may come with a rate adjustment if market rates have moved since your loan originated. Some lenders charge a flat fee of a few hundred dollars; others reprice the remaining term.
Cost overruns can also stall things. If the project blows past its budget, the lender’s loan-to-cost ratio gets out of balance, and draws may be frozen until you inject cash to cover the shortfall. That freeze delays completion, which delays the final closing. Most lenders require a contingency reserve of 5% to 10% of total construction costs built into the original loan, with higher-risk or custom projects sometimes requiring 10% to 15%. A guaranteed maximum price contract from the builder shifts overrun risk to the contractor and reduces the odds of a delayed conversion.
If you’re on a single-close loan, an extension keeps you on the same loan document you signed at the first closing. If you’re on a two-close, a delay compresses the window between construction wrap-up and your permanent loan application, so build in more lead time than you think you need.