Construction Loan

A construction loan is a specialized form of financing designed for borrowers who are building a new home or undertaking major renovations. Unlike traditional home loans, which are disbursed as a lump sum, construction loans are disbursed in stages—called “draws”—as the project progresses. These draws align with key milestones such as laying the foundation, framing, roofing, etc.

These loans are short-term, generally lasting 6–18 months, and usually carry higher interest rates due to the increased risk. Borrowers typically make interest-only payments during the construction period, based on the amount disbursed so far.

There are typically two types of construction loans:

1. Construction-Only Loan: Covers only the construction period. Once construction is complete, the borrower must refinance into a permanent mortgage.

2. Construction-to-Permanent Loan: Automatically converts to a traditional mortgage once the building is completed, saving on closing costs and paperwork.

Lenders require detailed construction plans, a realistic budget, a qualified builder, and a strong credit profile before approving a construction loan. Additionally, inspections are often required before each draw is released.