Construction loans are short-term financing options that fund the building or major renovation of a home or commercial property. These loans are typically structured with a draw schedule, meaning funds are released in increments as construction milestones are met. Borrowers usually make interest-only payments during the construction phase, which typically lasts 6 to 18 months. Because construction loans carry more risk, they generally have higher interest rates and stricter qualification requirements than traditional mortgages.

 Once the construction is complete, the borrower either refinances into a permanent mortgage or uses a construction-to-permanent loan that automatically converts without a second closing. Lenders closely monitor progress through inspections and often require detailed plans, a licensed builder, and a realistic budget. These loans are ideal for borrowers building custom homes or developers starting new residential or commercial projects, and they ensure funding is tied to verified progress.