Building a Custom Home in the Hill Country: Construction-to-Permanent Loans

If you want to build rather than buy, the financing question comes first: how do you pay for the construction, and how does that become the mortgage? Construction-to-permanent is the answer that covers both, and the rules below are the verified foundation, cited exactly so you can check them yourself.

One closing or two, your choice

Fannie Mae Selling Guide B5-3.1-01 (06/04/2025) allows construction-to-permanent financing as one closing or as two separate closings. In the one-close version, you sign once and the construction loan automatically converts into the permanent mortgage when the build is done, with the rate and terms set at that first closing. In the two-close version, you close the construction loan first and then refinance into the permanent loan at completion.

Each structure fits a different buyer. One-close is usually the cleaner path for a custom build because the permanent terms are locked up front, but the two-close path gives you a second chance at the market rate at the end. Which one your situation calls for depends on your lot, your builder payment schedule and the lender's construction matrix.

You must hold title to the lot

B5-3.1-01 (06/04/2025) is explicit: the borrower must hold title to the lot. Whether the lot is paid in full or has a lot loan that clears at the construction closing, the borrower has to be on title before the construction financing funds.

What the lender must keep on file

The same rule lists the completion evidence: the lender keeps a Form 1004D, or an acceptable completion alternative, plus a certificate of occupancy or its equivalent. That means the home has to be inspected as complete and legally occupiable before the permanent phase of the loan proceeds, which is why the final inspection date drives the conversion schedule.

What doesn't qualify

B5-3.1-01 (06/04/2025) also draws the boundary: attached condominium units and co-ops are ineligible for construction-to-permanent financing. Detached single-family builds, including a custom home on a Hill Country acreage lot, are the normal use of this product.

The details to verify with your lender

• Maximum LTV, reserves, interest reserve and draw rules: not verified in this pass. Check Fannie Mae B5-3.1-02 and the lender's construction matrix, because these vary by lender and loan program.
• FHA one-time-close: not verified. The check is HUD Handbook 4000.1.
• VA one-time-close: not verified. The check is VA Pamphlet 26-7.
• USDA one-time-close: not verified. The check is USDA HB-1-3555.

The builder side matters too. Before the loan conversation, get a fixed-price build contract, a completion schedule and the builder's license and insurance in hand, because the lender's construction review runs against those documents. The new construction process guide covers the contract and walkthrough sequence in full.

Frequently Asked Questions

Sincerely,
Patrick Kevin Fagan

Fannie Mae rules verified September 25, 2026 against Selling Guide B5-3.1-01 (06/04/2025). Maximum LTV, reserve, interest-reserve and draw rules, and FHA, VA and USDA one-time-close specifics are unverified in this pass; confirm them with your lender and the official program handbooks.