How does a construction loan become your mortgage when you build a custom home?

Two ways, and you choose before the first shovel. In a single closing, the construction loan converts automatically into the permanent mortgage when the house is finished. In two closings, the construction loan is paid off at the end by a separate refinance on a brand-new note. That choice changes your timeline, your paperwork, and what your loan is legally called.

Everything on this page comes from the Fannie Mae Selling Guide, read on 6 November 2026. That attribution matters, and the second-to-last section explains why: these are the rules Fannie Mae applies to the loans it buys, not a universal law of construction lending.

What is construction-to-permanent financing?

It is a long-term mortgage that replaces the short-term loan that paid for the build.

The Selling Guide's overview section defines it as "the granting of a long-term mortgage to a borrower for the purpose of replacing interim construction financing that the borrower has obtained to fund the construction" of the home. It then says the arrangement "can be structured as a transaction with one closing or a transaction with two separate closings."

One requirement sits underneath both structures: "The borrower must hold title to the lot, which may have been previously acquired or be purchased as part of the transaction." The lot can come with the deal or come before it, but it has to be yours.

Two property types are shut out entirely. The guide lists attached condominium units and all cooperative properties as ineligible for this financing.

Who actually pays the builder?

The lender does, and in a single-closing transaction the guide puts that duty in writing.

Fannie Mae's single-closing section says the lender is "responsible for managing the disbursement of the loan proceeds to the builder, contractor, or other authorized suppliers." That is the sentence most first-time custom-build buyers get wrong. You are not writing checks to your builder out of a pot of borrowed money. Your lender is releasing funds against the build, and your builder is being paid by your lender.

The practical consequence is that your builder's payment schedule and your lender's disbursement process have to agree with each other before you sign. They are two documents written by two companies, and nobody checks that they match unless someone makes it their job.

How long can the build take before the loan becomes a problem?

Eighteen months, total, and the guide says that ceiling does not move.

For single-closing transactions, the construction period "may have no single period of more than 12 months and the total period may not exceed 18 months." Extensions are allowed, but only up to that 18-month total. The guide then closes the door: "Exceptions to the 12-month and 18-month periods will not be granted."

The guide gives examples of how the periods can be arranged within that limit — three six-month periods, one 12-month period followed by one six-month period, or six three-month periods. The shape is flexible. The outer limit is not.

After conversion, the permanent loan term cannot exceed 30 years, and the construction period is disregarded in measuring it.

Why does it matter who owned the lot first?

Because it determines whether your loan is a purchase or a refinance, which changes how the loan amount is calculated.

The test in the guide is the date of the first construction advance, not the closing date. For the transaction to be a purchase: "The borrower is not the owner of record of the lot at the time of the first advance of interim construction financing." For it to be a limited cash-out refinance: "The borrower is the owner of record of the lot at the time of the first advance of interim construction financing."

So a buyer who bought a homesite two years ago and is building on it now is refinancing, not purchasing, even though there has never been a house there. And one more limit applies to the single-closing route: "Cash-out refinance transactions are not eligible for single-closing construction-to-permanent mortgages."

How is the loan amount set when the house does not exist yet?

Against an "as completed" appraisal — and on a purchase, against whichever of two numbers is lower.

	What the loan amount is measured against
Single closing, purchase	The lesser of the purchase price (the cost of construction plus the sales price of the lot) or the "as completed" appraised value of the lot and improvements
Single closing, limited cash-out refinance	The "as completed" appraised value of the lot and improvements

Two timing rules ride along with that appraisal. The effective date of the appraisal "must be no more than four months prior to the note date." And at the end of the build, "an Appraisal Update and/or Completion Report (Form 1004D) must be completed in its entirety."

There is also a downside provision worth reading before you budget. If the value has declined, "the lender must obtain a new appraisal for the property and requalify the borrower." A build that finishes into a softer market can send you back through underwriting.

What happens at conversion in a single closing?

The loan is modified, and the modification has a deadline: it "must take place prior to or at the time of conversion."

Four terms can be changed at that point — the interest rate, the loan amount, the loan term, and the amortization type. Anything beyond those four requires the two-closing structure instead.

The loan amount is the one with a condition attached. Increases are "permitted only as necessary to cover documented increased costs of construction of the property." Cost overruns can be absorbed, but they have to be documented overruns, not a decision to borrow more.

Mechanically, the guide allows two routes. Either a construction loan rider is used, with the construction provisions rendered "null and void at the end of the construction period and before the permanent loan is sold," or "A separate modification agreement must be used," executed and recorded before the loan is sold. The modification itself goes on Fannie Mae Form 3179 for a fixed rate or Form 3161 for an adjustable rate, or a substantially similar document.

Your file gets re-checked too. Credit documents must be "no more than four months old at the time of conversion." There is an exception stretching that to 18 months, but only where the loan-to-value is 95 percent or less and the file received an Approve/Eligible recommendation through Desktop Underwriter at the original closing. Asset documents are not required again at conversion unless requalification calls for more reserves.

How is a two-closing transaction different?

Two closings means two separate sets of legal documents, and the second one is a refinance.

The guide describes the first closing as obtaining the interim construction financing, which "may include the purchase of the lot," and the second as obtaining the permanent financing "upon completion of the improvements." It is explicit about which half Fannie Mae takes: "Fannie Mae does not purchase construction loans (the first closing); however, Fannie Mae does purchase loans that were used to provide the permanent financing."

At that second closing the permanent loan is treated as either a limited cash-out refinance or a cash-out refinance. Where it is a cash-out refinance, a holding period applies: "the borrower must have held legal title to the lot for at least six months prior to the closing of the permanent mortgage."

And the paperwork is not a patch on the old loan. The guide is direct: "A modification may not be used to update the original note, rather a new note must be completed and signed by the borrower(s)."

Single closing or two — what actually differs?

	Single closing	Two closings
Number of closings	One	Two, with two separate sets of legal documents
Construction period limit stated in the guide	No single period over 12 months; 18 months total; exceptions "will not be granted"	Not stated in the two-closing section
How the permanent loan arises	The construction loan "will automatically convert to a permanent long-term mortgage loan upon completion of the construction"	A separate permanent loan closes on completion
Eligible purpose	Purchase or limited cash-out refinance. Cash-out "not eligible"	Limited cash-out refinance or cash-out refinance
Document used at the end	A modification — Form 3179 or Form 3161, or a construction loan rider	A new note; "A modification may not be used"
Which part Fannie Mae buys	The converted loan, only after construction is complete and terms have converted	The permanent financing only, not the construction loan
Lot holding period	Ownership on the date of first advance decides purchase vs refinance	Six months' legal title required where the second closing is a cash-out refinance

What has to be true before the loan can be sold?

The house has to be finished and the bills have to be paid.

The guide requires that the construction work be "completed and paid for," and that liens be satisfied, before the loan is delivered to Fannie Mae. The lender keeps Form 1004D or an acceptable completion alternative in the file. Where the loan funded an unimproved lot plus the construction on it, the lender also keeps a certificate of occupancy or the equivalent.

Single-closing loans carry one extra gate: they "cannot be purchased by Fannie Mae until the construction is completed and the terms of the construction loan have converted." Underwriting throughout is "based on the terms of the permanent financing," not the construction loan.

Whose rules are these, and when do they not apply?

They are Fannie Mae's, and they bind loans Fannie Mae buys.

That is the single most important caveat on this page, and it is the one most likely to matter to someone building a custom home. A construction loan that will never be sold to Fannie Mae — a portfolio product a bank intends to keep, or a jumbo construction loan above the conforming limit — is written to that lender's own guidelines. The 18-month ceiling, the four-month appraisal window, the modification forms: none of it automatically governs a loan Fannie Mae is not buying.

So the useful question to a construction lender is not "how does this work" but "which guidelines is this loan written to, and may I see the construction period and disbursement terms in writing before I sign." The answer is theirs to give, and it is reasonable to ask for it early.

Whatever state-law requirements attach to the lien documents on a Texas homestead build are handled by the attorney and the title company who prepare and close them. This page does not describe those requirements, and the final section explains why: nothing here paraphrases a statute that was not read on the date of this run.

Who decides what, in one list

• The lender decides which guidelines the loan is written to, approves the borrower, sets the construction period, and disburses funds to the builder.
• The appraiser produces the "as completed" valuation and, at the end, the Form 1004D update.
• The builder sets the construction schedule and the draw requests that the lender pays against.
• An attorney and the title company prepare and close the loan and lien documents, including any state-law requirements that attach to them, which this page does not cover.
• A CPA advises on the tax treatment of construction-period costs.
• Your agent holds the timeline, makes sure the builder's schedule and the lender's disbursement terms are compared before signing rather than after, and raises the questions above while there is still time to get answers. Not one of these decisions is an agent's to make.

What this page deliberately does not answer

Four things, named rather than guessed at.

Construction-period interest. Whether you make interest-only payments during the build, how interest accrues, and whether that interest can be financed are not addressed in the Selling Guide sections read for this page. Ask your lender directly; the answer is a product term, not a guideline.

What the appraiser is handed. The sections read here establish the "as completed" appraised value as the valuation basis but say nothing about plans and specifications being provided to the appraiser. That wording may exist elsewhere in the guide; it is not in these sections.

Acting as your own builder. Whether a borrower may serve as their own builder or general contractor, and on what conditions, is not addressed in any of the four sections read. Do not read silence as permission.

The Texas statutory text. The provisions of the Texas Constitution and the Texas Property Code that bear on construction liens, homestead liens and retainage are named here only as the place to look. Nothing from them is quoted, summarized or paraphrased on this page, because the state's statute site served no readable text to automated retrieval on the date of this run. Read the statute, or have an attorney read it, before relying on any description of what it requires — including a description that sounds confident.

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Sources read 6 November 2026

• Fannie Mae Selling Guide, B5-3.1-01, Conversion of Construction-to-Permanent Financing: Overview (section dated 06/04/2025) — https://selling-guide.fanniemae.com/sel/b5-3.1-01/conversion-construction-permanent-financing-overview
• Fannie Mae Selling Guide, B5-3.1-02, Conversion of Construction-to-Permanent Financing: Single-Closing Transactions (section dated 05/06/2026) — https://selling-guide.fanniemae.com/sel/b5-3.1-02/conversion-construction-permanent-financing-single-closing-transactions
• Fannie Mae Selling Guide, B5-3.1-03, Conversion of Construction-to-Permanent Financing: Two-Closing Transactions (section dated 08/07/2019) — https://selling-guide.fanniemae.com/sel/b5-3.1-03/conversion-construction-permanent-financing-two-closing-transactions
• Fannie Mae Selling Guide, B5-3.1, Conversion of Construction-to-Permanent Financing (chapter contents) — https://selling-guide.fanniemae.com/sel/b5-3.1/conversion-construction-permanent-financing

Nothing on this page is legal, tax or lending advice. Dreams 2 Doorsteps explains process. Your lender sets loan terms, and an attorney and a CPA advise on documents and tax.