What is a construction loan?

A construction loan is specifically designed to provide short-term financing for the building of a home or other real estate projects. This type of loan is utilized during the construction phase, allowing borrowers to finance the costs associated with construction, such as materials, labor, and other expenses that arise during the building process.

Typically, construction loans have a shorter term than traditional mortgages and are often interest-only during the construction period. Once the construction is complete, the loan may convert to a permanent mortgage, allowing for longer repayment terms. This differentiates construction loans from long-term mortgages, which are used for buying completed homes, and from pure land loans, which do not finance any construction activities.

Understanding the specific purpose and features of construction loans is crucial for both borrowers and real estate professionals, as they play a significant role in the financing of new building projects and renovations.