Construction Loans: Financing the Path to a Newly Built Home

A construction loan is a short-term mortgage used to finance the building of a new home. Because the home does not exist at the time the loan is originated, the lender cannot use the completed property as collateral in the same way it would for a standard mortgage. Instead, the loan is based on the plans, the budget, and the borrower’s qualifications.

Funds from a construction loan are typically disbursed in stages, known as draws, as construction progresses. Each draw corresponds to a milestone, such as completing the foundation, framing, or finishing work. An inspector may verify that the milestone has been reached before the next draw is released. This staged disbursement protects both the lender and the borrower by ensuring that funds are used for their intended purpose.

After construction is complete, the construction loan is often converted to a permanent mortgage. Some construction loans are structured as construction-to-permanent loans, which means the conversion happens automatically at the end of construction. Others require the borrower to obtain a separate permanent mortgage. Your loan officer can explain the options and help you understand which structure fits your situation.