Construction loan

Construction loan is a money term you need to understand. Here’s what it means.

What is a construction loan?

A construction loan is a short-term, interim loan to pay for building a house. As work progresses, the lender pays out the money in stages, called draws.

Deeper definition

A construction loan is borrowed for a duration that covers the time it takes to build a house. Both builders and home buyers can seek these loans, and they cover the expenses associated with many of the construction expenses that the house builder incurs, including:

  • Building materials.
  • Labor.
  • Excavation.
  • Inspections and permits.
  • Other expenses.

Lending institutions generally require the information for a construction loan’s intended use upfront, before granting the loan. Often, construction loans only are taken in special situations, since a normal loan would cover a typical home in a new subdivision or some other routine type of new construction.

Because construction loans are only granted in certain situations, you cannot simply apply for one online. Online banks do not offer construction loans, so the options for getting them are somewhat limited. Local banks and credit unions provide construction loans, since they understand the communities that they serve and the unique nature of construction requiring special loans.

Similar to a student loan, construction loans are not called upon until after the construction is complete. Often, interest must be paid throughout the loan duration, and payments are due afterward, usually within 6 to 24 months of the issue date. Sometimes, construction loans are rolled into the home’s mortgage to simplify accounts.

Construction loan example

If you are building a new home that has some special factors, like a unique eco-friendly construction plan, you may qualify for a construction loan. To apply for this loan, your builder would need to provide you with build plans and a detailed list of required materials, and possibly even a timeline.

Then, you would take this information to your local lending institution when you apply for the loan. Because your local bank represents your community, you need its approval for accessing funds to build in the community.

Want to learn more about how a construction loan works? Check out some more information about how these specific loans work.

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