Construction Loan 101: How It Actually Works

A construction loan is a short-term loan that funds your build in stages called "draws." Unlike a traditional mortgage, the lender doesn't hand you all the money at once. Instead, your builder requests funds as each phase is completed and verified by an inspector. Most construction loans are interest-only during the build and convert to a permanent mortgage once construction is complete. This is called a "construction-to-permanent" loan. Key things to know: - You'll typically need 10–25% down depending on the lender. - Draws are tied to phase completion (foundation, framing, mechanicals, etc.). - Your builder gets paid after each inspection, not before. - Interest is paid monthly on the amount drawn so far, not the full loan. Always verify exact requirements with your lender — programs vary by state, lender, and loan product.