Construction to Permanent Loan for a Modular Home: A Buyer's Guide

A construction to permanent loan rolls the build and the mortgage into one. You close once, lock the rate before construction starts, and pay interest only on funds released as the work moves along. When the home receives its certificate of occupancy, the loan converts automatically into a standard 15 or 30 year mortgage. One set of closing costs. One credit pull. No requalification after the build.

For a new modular home, this is the most common financing route. FHA, VA, USDA, and conventional programs all offer some version of it. The headline mechanics look identical to stick built construction financing. The friction is in how draws are released for factory built homes, which lenders will actually fund a modular build, and which programs that were widely available a year ago have quietly shrunk to almost no one.

Construction loan rates in 2026 run 7.3% to 8.8%, with a weighted average around 8.4% as of April 2026, roughly 1 to 2 percentage points above conventional permanent mortgage rates (Buildermuse). The spread is the price of locking in before construction starts.

What a construction to permanent loan is

The loan covers two stages of the same project. During the construction phase, which runs 3 to 7 months for most modular builds, the lender releases funds in scheduled draws as milestones are verified. You pay interest only on the amounts drawn, so payments start low and increase as more of the loan is funded. When the home is complete and the certificate of occupancy is issued, the loan converts automatically to a fully amortizing mortgage on the full balance. Principal and interest payments begin.

This structure exists in two forms. A one time close (sometimes called single close) collapses the construction and permanent phases into one closing, with the permanent rate locked before construction starts. A two close splits them into separate loans with separate closings. For modular homes, the one time close is almost always the better fit.

Rate certainty is what makes this structure valuable. A construction project that takes six months can outlast a rate environment. Buyers who close at the start of construction know what their permanent mortgage rate will be, regardless of where rates move during the build.

How the two phases work

A typical modular construction to permanent timeline runs four to eight months from application to the first principal and interest payment. Loan approval takes 4 to 8 weeks, factory production 8 to 16 weeks, delivery and site work 2 to 6 weeks, and final inspections plus conversion to the permanent mortgage another 2 to 4 weeks.

During the construction phase, payments are interest only on disbursed funds. A $60,000 draw at 7% interest costs about $350 a month. Payments increase as more of the loan is released. The full balance does not start accruing interest until the loan converts.

Faster modular construction is a real cost advantage during this phase. A modular build that finishes in 3 to 6 months instead of the 9 to 12 months typical for stick built saves roughly $11,667 in construction phase interest on a $250,000 loan. That is what shorter interest only payments do to the math.

One time close vs two close construction loans

A one time close combines construction and permanent financing into a single closing. You apply once, qualify once, lock the rate once, and pay one set of closing costs. A two close splits the loan in two: a short term construction loan that closes first, then a separate permanent mortgage that closes after the build is complete. You apply twice. You qualify twice. You pay closing costs twice.

The duplicate closing cost difference runs $3,000 to $8,000, depending on loan size and state. That alone is enough to push most buyers toward the one time close.

The two close has one structural advantage: you can shop rates after construction is complete. If rates drop sharply during the build, a two close buyer can capture some of the drop at the second closing. The trade off is that you carry rate risk during the build. If rates rise, you pay the higher rate when you close on the permanent loan.

For modular construction, the one time close usually wins. The build is shorter, which means less rate volatility to ride out. The cost savings on the second closing are real. And rate certainty during a short build matters more than the option to shop rates at the end.

Feature	One time close	Two close
Closings	1	2
Closing costs	Paid once	Paid twice ($3,000 to $8,000 more)
Rate lock	Before construction	After construction
Requalification	Not required	Required for permanent mortgage
Best for	Standard modular builds, rate certainty	Long or complex builds in a falling rate environment

Loan programs that work for modular construction

Four programs finance modular construction to permanent loans. They differ on down payment, credit floor, income limits, and how reliably they are available right now.

FHA One Time Close. Down payment is 3.5% with a 580 credit score, or 10% with a score of 500 to 579. The program floor is 580, but most FHA lenders apply their own overlay at 640 in practice. The home must be on a permanent foundation, and the borrower must own (or be buying) the land as part of the loan. Modular homes are treated identically to site built for FHA purposes. Note the FHA mortgage insurance premium does not drop automatically at 80% LTV. Removing it requires a refinance to a conventional loan.

VA One Time Close. Zero down for eligible veterans with full entitlement — VA imposes no maximum loan amount. Minimum credit score is 620, though surviving construction lenders typically require 680. The funding fee is 2.15% of the loan amount on first use, 3.3% on subsequent use. Modular, hybrid modular, log homes, and barndominiums are explicitly eligible. The caveat: the majority of VA lenders suspended their one time close construction loan products in mid 2025 after the secondary market tightened guidelines. The product still exists, but only a small number of lenders are originating. Veterans planning a VA construction loan should verify current availability before assuming the program is on the table.

USDA Construction to Permanent. Zero down in eligible rural areas. Minimum credit score is 640 for automated underwriting, with manual underwriting possible at 580 to 620 if compensating factors are strong. Household income capped at 115% of area median income. The same warning applies as VA: most lenders have discontinued USDA construction loans, even where USDA permanent loans remain available. USDA publishes a participating construction lender list at rd.usda.gov. Check the list before planning around USDA construction financing.

Conventional (Fannie Mae eligible). Down payment runs 10% to 20% for the construction phase, higher than the 3% to 5% minimums for a standard purchase mortgage. As of November 2025, Fannie Mae and Freddie Mac removed their hard 620 credit score floor for loans run through automated underwriting and now use a full risk assessment instead. Practical lender floors still hover around 640. Modular homes are treated identically to site built single family homes. Conventional construction loans have the widest lender availability of the four programs and the fewest property restrictions.

Program	Down payment	Credit score	Income limit	Status in 2026
FHA OTC	3.5% at 580+	580 (640 practical)	None	Widely available
VA OTC	0%	620 (680 practical)	None	Mostly suspended mid 2025; verify
USDA OTC	0% (rural only)	640	115% AMI	Discontinued by most lenders; verify
Conventional	10% to 20%	No fixed minimum (Nov 2025+)	None	Widely available

A note on terminology that matters for financing. Modular homes are built to state and local building codes and titled as real property from the start. Manufactured homes (HUD code) are built to a federal standard on a permanent steel chassis and default to personal property titling. Several lenders and even some appraisers use the terms interchangeably. They are not interchangeable. The loan programs and lender options for modular are broader than for manufactured, and using the wrong term in your loan conversation can route you to the wrong product. See modular vs manufactured for the full comparison.

Why factory draws are different from stick built

Standard construction lenders release draws based on on site inspection milestones. Foundation poured: draw. Framing complete: draw. Drywall up: draw. Mechanical rough in: draw. The inspector walks the property, signs off, and the lender funds the next stage.

A modular home is 80 to 90 percent complete before it arrives on your land. The framing, drywall, electrical, plumbing, cabinets, and finishes all happen in a factory. The on site portion is foundation, crane set, module connection, utility hookups, and final trim. By the time the modules arrive, most of the work is done.

This creates a structural problem for lenders whose draw systems were built for stick built construction. Their workflow cannot release funds against work that happened off the property. They were not designed to fund a factory invoice. Many of them will not start.

Manufacturers, meanwhile, need 20% to 50% of the unit cost upfront to buy materials for your specific home, reserve a production slot, and book skilled labor. If your lender cannot fund the factory deposit, you either pay it out of pocket or lose the production slot.

Modular experienced lenders solve this with a different draw schedule. The factory deposit (typically 10% to 20% of the unit cost) releases at or near closing, against a manufacturer invoice and a financial review of the manufacturer. Subsequent factory draws release against photos, factory inspections, or shipping confirmation. On site draws (delivery and set, site work, final retainage) follow the standard milestone pattern once the home is on the lot.

A typical modular draw schedule looks like this:

1. Deposit at closing (10% to 20%): Releases to manufacturer to start production.
2. Factory completion (30% to 40%): Verified before shipping, via photos or factory inspection.
3. Delivery and set (20% to 30%): Released after modules are placed and connected on the foundation.
4. Site work (10% to 20%): Covers utility hookups, driveway, landscaping, exterior trim.
5. Final retainage (5% to 10%): Held until the certificate of occupancy is issued.

Confirm the draw schedule with any lender before you sign. Ask whether they have funded a factory deposit against a manufacturer invoice before, and ask what documentation they require for it. If the answers are vague, find a different lender.

Qualification requirements beyond credit and down payment

Debt to income ratio caps at 43% for most programs, with FHA going up to 50% if there are strong compensating factors. The DTI calculation typically uses the projected permanent mortgage payment, not the lower interest only construction phase payment. The down payment percentage applies to the total project cost (land plus construction), not just the construction portion.

Cash reserves. Most lenders require 3 to 6 months of projected permanent mortgage payments in reserves on top of the down payment.

Builder approval. Every program requires a licensed, insured, lender approved builder. Self builds and family contractors are not permitted, even by experienced trades.

Before applying, have your manufacturer selected and the model spec’d. Most lenders need plans, manufacturer specifications, a site assessment, and a projected timeline for underwriting. Soil tests, building plans, site plans, zoning approvals, and permits must typically be completed before the construction loan closes, and those costs ($2,000 to $5,000 and up) come out of pocket before the loan funds.

Finding a lender that funds modular construction

Most conventional banks decline modular construction loans. Their loan origination systems are built for stick built construction and cannot accommodate factory deposits without a custom workflow. Some lenders also confuse modular with manufactured and default to the more restrictive manufactured underwriting.

Using the wrong lender is expensive. A real case: a first lender quoted 7.5% on what they treated as a higher risk modular loan; a modular specialist quoted 6.75%. The 0.75% difference is about $36,000 over 30 years on a $200,000 loan, roughly $100 a month.

Four lender categories are worth calling first:

• Modular and manufactured construction specialists. Fairway Mortgage, Guild Mortgage, GO Mortgage, Capital Home Mortgage, ManufacturedNationwide, and CrossCountry Mortgage run dedicated factory built construction programs.
• Farm Credit associations. Rural lenders like Texas Farm Credit run construction loan programs designed for rural homebuilders and are often more flexible on non standard construction.
• Credit unions with construction loan programs. Local credit unions, particularly in rural areas, often underwrite modular construction when commercial banks decline.
• USDA participating lenders. The official participating lender list at rd.usda.gov is the cleanest way to find one still funding USDA construction loans.

When you find a candidate lender, ask whether they have funded a modular construction to permanent loan before, what their draw schedule looks like for factory production, whether they can release a factory deposit against a manufacturer invoice without a site inspection, and what documentation they require for that draw. Vague answers are a signal. Specific answers, with examples, are a green light.

Common pitfalls and how to avoid them

Appraiser unfamiliar with modular construction. Appraisers sometimes use manufactured home comparables when valuing a modular home, which drives the appraisal lower than it should be. One real case: an appraisal came in at $310,000 against an expected $350,000 because the appraiser treated the home as a double wide. A modular certified appraiser brought the same home in at $345,000. Ask your lender whether the assigned appraiser has factory built experience. Request a different one if not. You can also provide comparable sales for the appraiser to consider under the CFPB reconsideration of value process.

Lender not set up for factory draws. If the lender cannot fund the factory deposit against a manufacturer invoice, production stalls and the factory production slot is at risk.

Zoning mismatch. One real case: a buyer purchased land zoned agricultural only without checking modular eligibility. Loan rejected. Three month delay. $5,000 in fees to resolve. Verify zoning permits modular homes specifically, not just residential structures generally.

VA or USDA availability assumed, not confirmed. Both programs faced major lender withdrawal in 2025. Verify lender availability today rather than relying on older guidance.

FHA MIP that does not drop. FHA mortgage insurance premium does not automatically drop when the loan reaches 80% LTV. Removal requires a refinance to a conventional loan. Factor that ongoing cost into the FHA versus conventional comparison.

A modular construction to permanent loan is the same loan structure as a stick built construction loan, with one important difference in how draws release and a small number of program specific availability issues to verify. None of this is a reason not to use the loan. It is a reason to talk to the lender about the factory draw schedule before signing anything.

When the loan is set, the work is finding the home. Browse modular home manufacturers on Prefab Market, or look at typical modular home prices to anchor the project budget before the lender conversation.