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What is a Construction Loan?

A construction loan is short-term financing that can be used to cover the costs associated with building a house from start to finish. These types of loans may cover the costs of buying land, drafting plans, permitting, and materials. In general, construction loans let future homeowners borrow money to purchase materials and pay for labor necessary to build a home.

Because construction loans are generally intended to cover the building process, they’re typically issued for a period of 12 months. That said, some loans automatically convert into a permanent mortgage once construction is completed. Unlike traditional mortgages, construction loans aren’t secured by a completed house. For that reason, the application and approval process for a construction loan are more complex. Due to these uncertainties’, lenders will want to see as much detail about the proposed project as possible. Your lender will ask to see your building agreement and construction timeline. After you’re approved for a construction loan, you won’t receive all the funds as a lump sum. Instead, the lender will make payments to your builder through a series of draws or installments as the various stages are completed. Below is a general timeline to help understand the process.

Your lender will likely send an inspector to evaluate the status of construction prior to each payment. Depending on the lender, you may have an option of converting your construction loan into a mortgage application after construction is complete. If this is not an option, you can apply for a mortgage to pay off your construction loan. There is a lot to consider when choosing a construction loan lender, and it’s easy to get overwhelmed. You shouldn’t make this decision in haste. Make sure you choose a lender that fits your building needs by asking questions. Such as:

  • What types of construction loans do you offer?
  • What interest rates are available?
  • Do you charge closing costs or other fees?
  • How do you pay construction draws?


We’d love to help you with the process of building your dream home, so when you’re ready to start on the land buying and building side of the process, contact us.