If you're planning to build a home from the ground up, you'll need construction financing that eventually converts to a permanent mortgage. You have two structural options: the traditional two-close model or the increasingly popular one-close construction-to-permanent loan. Each has distinct mechanics, cost implications, and qualification timing that matter to your bottom line.
How two-close construction loans work
The traditional approach involves two separate loan transactions. First, you close on a short-term construction loan—typically a 12-month interest-only note at a variable rate. The lender disburses funds in draws as the builder hits milestones: foundation, framing, mechanical rough-in, and so on. You pay interest only on the amount drawn to date, not the full loan amount. When construction finishes, you apply for and close on a separate permanent mortgage, paying a second set of closing costs—title work, appraisal, origination fees, and recording charges. These figures are illustrative; rates and products are subject to change and this is not a commitment to lend.
This structure means two underwriting events: once before you break ground, again when the home is complete. If market conditions shift or your financial picture changes during the build, the second loan isn't automatic.
How one-close construction-perm loans work
A single-close loan combines both phases into one transaction. You lock your permanent interest rate at the initial closing, before construction begins. During the build phase, you still draw funds incrementally and pay interest only on the outstanding balance—often from an interest reserve account funded at closing, so you make no monthly payments during construction. When the certificate of occupancy is issued and the final inspection clears, the loan automatically converts to a standard principal-and-interest mortgage at the rate you locked months earlier. No second application, no second closing costs.
The appraisal happens upfront based on plans and specifications, establishing the projected as-completed value. That single appraisal supports both the construction draws and the permanent loan amount.
Which structure fits your situation
One-close loans appeal to borrowers who want cost certainty and rate protection. You avoid duplicate title insurance, duplicate origination fees, and the risk of rate increases during a six- or nine-month build. You also avoid re-qualifying: if your income dips or debt rises mid-construction, it won't jeopardize your permanent financing.
Two-close loans offer more flexibility if you expect your financial profile to improve—higher income, paid-off debts—and want to re-qualify for better terms once the home is finished. They're also more common with smaller local lenders who lack one-close products.
The Alliance take
For most owner-builders with stable income, the one-close model reduces complexity and caps costs. The upfront rate lock is especially valuable in a rising-rate environment. That said, program availability depends on credit score, down payment, builder credentials, and loan-to-cost ratio. Not every lender offers both options, and qualifying standards are typically stricter than for a purchase mortgage because you're financing both land acquisition and vertical construction risk.
Ready to explore which construction loan structure matches your building timeline and budget? Start an application and we'll walk through the mechanics specific to your project and property.