Construction Loan
Direct definition
A short-term loan that finances the build of a new home and is drawn on as work progresses.
Written by the Vabasso Mortgage Editorial Team · Reviewed against agency and federal sources · Read our editorial policy for how we research and review mortgage content
Plain-English explanation
Construction loans pay for land, materials, and labor. Most are interest-only during the build and convert to — or are refinanced into — a permanent mortgage at completion.
Why it matters
Building instead of buying requires a different financing structure than a standard purchase mortgage.
Where you may see it
- Loan Estimate
- Construction loan agreement
- Draw request forms
A real-world example
You take a 12-month construction loan of $500,000 with monthly interest-only payments on drawn balances; at completion, it converts to a 30-year mortgage.
Educational and illustrative only
A common misunderstanding
A construction loan isn't the same product as your eventual permanent mortgage — it's typically short-term and interest-only during the build.
Ask Vabasso AI
This glossary provides general educational information. Mortgage terminology, qualification methods, forms, timelines, fees, program rules, and legal meanings may vary by lender, investor, loan program, property, occupancy, state, and transaction. Definitions do not represent loan approval, legal advice, tax advice, or a commitment to lend.
- Author
- Vabasso Mortgage Editorial Team
- Reviewed by
- Vabasso Mortgage Licensed Advisory Team
- Last reviewed
- July 30, 2026