Building & Renovating
Construction Loans, Explained
How construction and construction-to-permanent loans finance homes that don't exist yet.
By Vabasso EditorialReviewed by Vabasso Mortgage Advisor PanelUpdated Jul 30, 20269 min read
Written by the Vabasso Editorial · Reviewed against agency and federal sources · Read our editorial policy for how we research and review mortgage content
Direct answer
A construction loan funds the build in stages tied to a draw schedule. A construction-to-permanent loan converts to a standard mortgage after completion, avoiding a second closing.
Key takeaways
- Draw schedules release funds as the build reaches milestones.
- Loan-to-cost and loan-to-value are both important underwriting metrics.
- Land equity can serve as a portion of the down payment.
How the draw schedule works
Funds are typically released in stages such as foundation, framing, mechanical, drywall, and finish. Inspections validate progress before each disbursement.
Important limitations
- Mortgage guidelines, eligibility, loan limits, rates, fees, and program availability may change and can vary by lender, investor, property, occupancy, state, and borrower profile.
- This article is educational and does not constitute a commitment to lend, a rate quote, or personalized financial advice.
Frequently asked questions
- Do I pay interest during construction?
- Most construction loans charge interest only on the drawn balance during construction, then convert to principal-and-interest payments after completion.
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