The sequence, in order
Most of what goes wrong on a build is a sequencing problem, so here is the order:
- Get the lot under control and get plans, specifications and a line-item budget from the builder.
- Close the loan. Once, before construction starts.
- The land is paid for and the balance goes into a construction escrow.
- The builder finishes a stage, it gets inspected, and a draw is released with your written authorization.
- Repeat through the last stage, the final inspection and the certificate of occupancy.
- The loan converts to permanent financing and the construction terms end.
Two closings, two sets of costs and two underwrites are the alternative, and Fannie Mae treats the second of them as a refinance (B5-3.1-03). The one-time-close page compares the single-closing programs side by side.
Before the lumber, the county paperwork
Outside a public sewer district, the budget carries county paperwork before it carries lumber. The Chester County Health Department administers the Pennsylvania Sewage Facilities Act here and issues the on-lot sewage permit, running the soil probe and percolation testing and enforcing a replacement-area policy, so the lot has to hold a reserve absorption area as well as the primary one. A well needs a county permit and a county-licensed driller (Chapter 500, section 501). Those are line items, and they land before the first draw.
One closing, before the first shovel
FHA’s version is the most fully written-down, so it is a useful yardstick. HUD Handbook 4000.1, section II.A.8.j, describes construction-to-permanent as combining a construction loan with a long-term mortgage “using a single mortgage closing prior to the start of construction.”
Three requirements from that section shape the whole file. The builder must be a licensed general contractor, and a borrower may act as their own only if they hold that license too. The borrower must either buy the land at the construction-loan closing or already own it. And the closing package carries a construction rider to the note, a construction loan agreement whose terms all end at conversion, an executed builder contract stating the price to build, and a disclosure that the mortgage is not FHA-insurable until the final inspection or the certificate of occupancy, whichever comes later.
The lot can be the down payment
FHA sets the maximum mortgage by applying the standard purchase loan-to-value to the lesser of the appraised value or the documented acquisition cost. Acquisition cost is the builder’s price to build, plus borrower-paid options and construction costs outside that price, plus the closing costs of any interim land financing, plus the land.
The land is where it gets interesting. Ground owned six months or less at case-number assignment counts at the lesser of cost or appraised value. Ground owned more than six months, or received as an acceptable gift, counts at appraised value. And the minimum required investment may be satisfied with cash or with land equity. Someone who bought five acres in the western townships three years ago and has watched the appraisal climb is in a very different position at that closing table from someone buying the lot the same morning.
Count the draws
Nobody in Washington sets the number of draws. It is a contract term, written into the construction loan agreement and the build contract, and it tracks the stages the work actually passes through. VA’s construction circular names the ones a local code office typically performs on a house: foundation, framing, and final (VA Circular 26-18-7, April 6, 2018).
What each one is for:
- Foundation. Footings and foundation are in, and sitting where the plan says, before anything gets backfilled.
- Framing. Structure, sheathing and roof are up and the rough mechanicals are still visible with the walls open.
- Final. The house matches the plans, specifications and approved change orders, and the code office issues the certificate of occupancy.
A build that draws at those three plus a rough-in stage and a closeout has five draws. Another builder writes seven. Five or seven, the number is in the contract before it is in the budget, so read it there first. Ask for the schedule in writing before you close, because that schedule is what your builder gets paid against — and each release needs your written authorization, so an invoice on its own moves nothing.
Conversion, and what it takes to end cleanly
At completion the construction escrow has to be fully extinguished, with any remainder applied to principal, and FHA requires a title update after conversion before the loan can be endorsed. That title update exists because mechanic’s liens are a real risk on a half-built house, and the lender wants clean title before the permanent loan stands on its own.
The construction terms in the loan agreement all end at conversion, which is the point of the single-closing structure: the permanent mortgage you signed for before the foundation went in is the mortgage you keep. Where the rate floated during construction under a written agreement, that agreement documents the float range, the lock-in point and a maximum rate, and you were qualified at that maximum from the start (HUD 4000.1 II.A.8.j). Nothing about the permanent loan gets renegotiated at the end unless the lender modified terms before conversion. How long each program lets the construction period run, and which of them permits an adjustment on the way through, is set out program by program on the one-time-close page.