B5-3.1-01, Conversion of Construction-to-Permanent Financing: Overview (03/01/2023)

The conversion of construction-to-permanent financing involves 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 a new residence.

Construction-to-permanent financing can be structured as a transaction with one closing or a transaction with two separate closings. The borrower must hold title to the lot, which may have been previously acquired or be purchased as part of the transaction.

All construction work, including any work that could entitle a party to file a mechanic's or materialmen’s lien, must be completed and paid for, and all mechanic's liens, materialmen’s liens, and any other liens and claims that could become liens relating to the construction must be satisfied before the mortgage loan is delivered to Fannie Mae. The lender must retain in its individual loan file a Form 1004D or a completion alternative of the completed property. When a construction-to-permanent mortgage loan provides funds for acquisition or refinancing of an unimproved lot and the construction of a residence on the lot, the lender must retain a certificate of occupancy or an equivalent form from the applicable government authority.

The lender must use Fannie Mae's uniform mortgage instruments to document the permanent mortgage. These documents may not be altered to include any reference to construction of the property, other than any alteration that Fannie Mae specifically requires.

Attached units in a condo project and all co-op properties are ineligible for construction-to-permanent financing. Detached units in condo projects are permitted for construction-to-permanent financing, including manufactured homes in a condo project (subject to applicable project review requirements).

For guidance on data entry for construction-to-permanent transactions in DU, see the related Desktop Underwriter Job Aid.