How Construction
Loans Work

A construction loan is a loan taken by an individual to finance the construction of a home and other associated costs, such as the land, labor, materials, and services necessary. There are multiple different types on construction loans available to consumers depending on their needs.

Construction-only loans cover the cost of building for the time it takes to build – the whole loan amount is usually due once the home is fully constructed. Construction-to-permanent loans change from a construction-only loan to a traditional mortgage upon completion of construction. Owner-builder construction loans are an option for professional builders and contractors who want to build their own home. Bridge loans are short-term loans available for borrowers until they secure the funds to finance the construction of a new home – a typical use case is for current homeowners who can’t finance construction until their current property is sold.

With a construction loan, the borrower commonly makes interest-only payments via the loan to contractors and subcontractors during the construction period, separated into “draws” scheduled based on the progress of construction. The draws are typically handled by a title company that will pay the general contractor who then will compensate the sub-contractors. This follows an establishment of clear understanding of respective responsibilities between the borrower and the contractor. Elements such as interest rate and procedure after construction is complete depend on the type of loan one has taken out and the subsequent policies of the lender.

To learn about what ANBFC can do to secure you a construction loan, watch my video and contact me to get started.

Jones, Jenn (2022). “Your Guide to the Ins and Outs of Home Construction Loans” [Article]. LendingTree. https://www.lendingtree.com/home/mortgage/how-construction-loans-work/ [Accessed August 10, 2022]

Kagan, Julia (2022). “Bridge Loan” [Article]. Investopedia. https://www.investopedia.com/terms/b/bridgeloan.asp [Accessed August 10, 2022]