A construction finance loan is a short-term, high-interest financing option used by developers or individuals to fund the building or renovation of residential and commercial properties. Funds are released in stages (“draws”) based on project milestones, with interest typically paid only on the amount utilized. Common examples include financing land purchase, raw materials, labor, and construction of custom homes or commercial projects. Synonyms include self-construction loans, builder loans, or project finance.
What is Construction Finance
Key Aspects of Construction Finance Loans:
- Usage Examples:
- Residential Development: Building a new home on owned land.
- Commercial Projects: Funding the construction of office buildings, shopping complexes, or residential projects.
- Renovation: Financing significant structural renovations.
- Inventory Funding: Providing funds for developers against completed, unsold units.
- How it Works:
- Draw System: Money is not given in a lump sum. Instead, it is disbursed in stages, such as after completing the foundation, framing, or roofing, based on inspection.
- Interest-Only Payments: Borrowers often make interest-only payments during the construction phase.
- Short-Term: Generally designed for a 1-2 year term, often converting to a traditional mortgage upon completion.
- Eligibility and Risks:
- Requirements: Requires strong credit, detailed construction plans, and a large down payment (often 20-25%).
- Risk: These are riskier for lenders because the property does not yet exist to serve as collateral, leading to higher interest rates than conventional mortgages.
- Synonyms/Related Terms: