A construction loan is a type of short-term loan that is specifically designed to cover the costs associated with building or renovating a property. This includes expenses such as purchasing land, paying for materials and labor, and covering other miscellaneous fees related to the project. Unlike traditional loans, which are typically used for buying an existing home, construction loans are meant to be used during the actual building process of a new property or major renovation.
During this time, the lender will release funds in stages as progress is made on the project. This ensures that the money is only being used for its intended purpose and helps prevent fraudulent activities. Once construction is complete and the home is ready to be occupied, the borrower can either refinance their loan into a traditional mortgage or pay off the construction loan in full.
In summary, a construction loan provides necessary funds during the building process of a new property, with the understanding that it will be paid back once the project is complete.