What type of loan is a construction loan?

A construction loan is specifically designed to cover the costs associated with building a new home or other real estate projects. It is typically a short-term interim loan that provides funds to pay for construction expenses, such as materials, labor, and permits, during the building process. The loan is usually disbursed in stages, called "draws," as construction progresses.

Once the construction is completed, the borrower may either repay the loan in full, often by obtaining a permanent mortgage, or convert the construction loan into a long-term mortgage. This differentiates construction loans from long-term loans, which are utilized for purchasing completed homes, and renovation loans, which specifically target home improvements rather than new builds. Additionally, while there are mortgages that cater to new constructions, they differ significantly from the short-term nature and use of a construction loan.