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What is the difference between "Construction-to-Permanent" and "Construction Only" loan programs?

A C/P or Construction-to-Permanent, also called "One Time Close" is a type of construction loan that rolls directly into your permanent financing once your home has received its Certificate of Occupancy. Typically, the borrower qualifies for the loan to the guidelines of the permanent loan. The borrower can select whatever end loan program that a lender may have in their portfolio (ie. 30 year fix; 3/1, 5/1, 7/1 ARMs, Interest Only, 15 year fix, etc.). The construction period is the riskiest part of the loan. Thus, lenders will charge a little more in fees to administer the loan and a higher interest rate during this period. Once the home is complete, then what has been actually used from the construction loan will convert into the principal amount of the permanent financing. Lenders who offer a CTP program typically do so because they want your permanent loan. Once the home is built, the lender now has a secured asset for their loan.

A Construction Only loan is obviously a construction loan only for the purpose to build the home. Once the home has been completed, the borrower is responsible to find a permanent loan to payoff the construction loan. In today's market, the construction only loan is mostly used by builders who build a home with the purpose to sell and owner occupied borrowers who have credit challenges.

Why would someone want to use the "Construction-to-Permanent" loan?

• One set of fees. With the C/P loan, the lender will charge only one set of fees for the loan.
• No worries about pre-qualifying for a permanent. When you are approved for the construction loan, you have been approved for the permanent loan.
• Competitive pricing. Those lenders in the C/P market want your business. Thus, the lenders are trying their best to make their programs competitive.

Why would someone want to use the "Construction Only" loan?

• Planning to sell the home during or immediately following completion. These loans are designed to be reimbursed by either a mortgage from a buyer of the home or a refinance.
• Experiencing credit challenges. Typically, borrowers who have a mid-FICO (credit) score of 620 or below will not qualify for a CTP loan and must look to the Construction Only products.
• You want a specialized permanent loan. Sometimes lenders who offer C/P programs do not carry the type of permanent loan that you desire. If this is the case, the borrower may have to go to another lender for the specific loan program that they desire.

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