How do I refinance a construction loan into a permanent loan?
You refinance a construction loan into a permanent loan once the property is complete, has a certificate of occupancy, and is leased or occupied enough to meet the permanent lender's coverage test, typically a 1.20 to 1.25 ratio, which usually happens three to nine months after completion. You can either shop the permanent loan at that point or use a construction-to-permanent loan that converts automatically.
What the permanent lender needs
| Requirement | Typical standard |
|---|---|
| Certificate of occupancy | Final, not temporary, with most lenders |
| Occupancy or leases | 85 to 90 percent leased, or a coverage ratio of 1.20 to 1.25 on actual rents |
| Seasoning | 0 to 6 months for rate-and-term; 6 to 12 for cash-out |
| Appraisal | New appraisal on the completed, leased property |
| Credit and reserves | The permanent product's normal requirements |
| Payoff | Construction loan balance plus any exit fee must be at or below the permanent loan amount |
Ranges vary by lender.
Which permanent loan
Rental one to four units: a DSCR loan, qualifying on rent, 30-year term, LLC vesting.
Five-plus units: a bank loan or an agency small balance loan, usually $1 million and up, once stabilized.
Building your business occupies: SBA 7(a) or 504, or a bank owner-user loan.
Build to sell: no permanent loan; the construction loan is paid from sale proceeds.
The timeline
- Completion. Final inspections and certificate of occupancy.
- Lease-up. Two to six months for small residential; longer for commercial.
- Application. Once occupancy or coverage is met; submit leases, rent roll, and the construction loan payoff.
- Appraisal and underwriting. Three to six weeks for DSCR, longer for bank and agency.
- Closing. The permanent loan pays off the construction loan.
Build the construction loan term to cover all of this plus a cushion. A twelve-month loan on a ten-month build with a three-month lease-up is already short.
Two ways to structure it
Two loans. A construction loan, then a shopped permanent loan. More flexibility, two closings, and the refinance risk is yours.
Construction-to-permanent. One commitment that converts at completion when the tests are met. One closing, pre-approved conversion, less flexibility on the permanent rate.
Where the refinance fails
- Rents come in below the projection and the coverage ratio misses.
- The completed appraisal is lower than the cost, so the permanent loan does not pay off the construction loan.
- Credit slipped during the build.
- The certificate of occupancy is delayed.
Each of these is why the permanent loan should be pre-qualified before the construction loan closes, with a rate cushion of a half point.
How CommFi handles it
Our lending desk prices the construction loan and the permanent loan together at the start, so the exit is confirmed before the first draw. It funds direct when it fits, and when a specific permanent lender or a construction-to-permanent lender is the better fit, the desk searches a database of 7,000+ lenders and the ones that fit compete for the file. Zero upfront fees.
Related reading
Related questions
- When can I refinance a construction loan?
- After completion and a certificate of occupancy, once the property is leased enough to meet the permanent lender's coverage test, usually 1.20 to 1.25.
- What permanent loan replaces a construction loan on a rental?
- Usually a DSCR loan for one to four units, and a bank or agency loan for five or more.
- Do I need a new appraisal to refinance out of construction?
- Yes. The permanent lender orders an appraisal on the completed, leased property.
- What is a construction-to-permanent loan?
- One loan that funds construction and converts to permanent terms at completion when agreed tests are met, with a single closing.
- What if the permanent loan does not cover the construction loan payoff?
- You bring the difference in cash or extend the construction loan while rents or value improve. Pre-qualifying the exit before closing avoids this.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.