Construction-to-Permanent Loan Draws for Lenders

A construction-to-permanent loan closes once and then behaves like two loans. For the months of the build it works as a construction loan: funds go out in draws against inspected progress, and the borrower usually pays interest only on what has been drawn. When the house is finished, the loan converts to its permanent terms and starts to amortize.

From the lender's side, the hard part is the handoff. The permanent loan inherits whatever the draw phase recorded, so a weak draw file becomes a weak mortgage file. This guide covers how the two phases fit together, what each draw needs and what conversion asks for. For the short definition, see what a construction-to-permanent loan draw is. It is general information; the loan documents and your counsel set the rules for each program.

In a single-close loan, one closing covers both phases and the loan converts on completion. In a two-close loan, a construction loan is paid off by a separate permanent loan with its own closing. Regulation Z lets the creditor disclose a construction-permanent loan as one transaction or as separate transactions (12 CFR 1026.17(c)(6)(ii)).

That choice decides where draw costs are disclosed. When the phases are disclosed separately, the official commentary on that section (comment 17(c)(6)-5, Regulation Z interpretations) sets how fees are allocated between them: a charge imposed separately for one phase goes to that phase, and since the Bureau's 2017 revision, its "but for" test, which assigns to the construction phase the charges that would not exist without the construction financing, applies to finance charges and points and fees. Draw inspection fees arise only in the construction phase. The Bureau's interpretations of the Loan Estimate rules also treat inspection and handling fees for staged disbursements as loan costs; our post on construction loan draw fees covers how they are disclosed. Have compliance counsel confirm how each program allocates and discloses them.

Investor rules make the handoff concrete. Fannie Mae will not buy a single-closing construction-to-permanent loan until construction is complete and the loan has converted to its permanent terms, and at completion it requires an Appraisal Update and/or Completion Report (Form 1004D) completed in full, including the certification of completion (Selling Guide B5-3.1-02). Before delivery, all construction work that could support a mechanics' lien must be completed and paid for, and the lender keeps the completion report or an acceptable alternative in the loan file (B5-3.1-01).

The completion report comes from the appraiser, not the draw inspector. What the draw record adds is the path to it: how each budget line reached 100 percent, which advance paid for what, and who was paid. When a reviewer asks how a line got there, the answer is in the draw inspections, not in the final appraisal.

RAZE documents the construction phase, draw by draw. The lender sets the required questions, photos and completion fields in the Ordering Engine, and the inspector completes them in the RAZE Mobile App. Each report shows percent complete for each draw sheet line, with photos linked to the lines they support, and every inspection keeps its status history, so the record that reaches conversion is the same one the lender reviewed at each draw.

Through RAZE, a residential draw inspection is a flat $125 per single-family inspection when RAZE sends the inspector, or $25 per request with your own inspector, at any U.S. address. See the RAZE Rate Card. RAZE documents the work; each release and the conversion stay with the lender.