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Construction financing is a type of loan that is used to fund the construction of a new building or the renovation of an existing one. It is typically provided by banks, credit unions, or other financial institutions and is secured by the property being built or renovated.
Construction financing is different from traditional real estate financing in that it is typically disbursed in stages, known as “draws,” as construction progresses. The borrower may be required to provide evidence of construction progress before each draw is released.
There are several types of construction financing, including:
Construction-only loans: These loans provide financing for the construction of a new building, but the borrower will need to secure permanent financing once the construction is complete.
Construction-to-permanent loans: These loans provide financing for both the construction of a new building and permanent financing once construction is complete. The loan is disbursed in stages during construction and then converts to a traditional mortgage once construction is finished.
Renovation loans: These loans provide financing for the renovation or rehabilitation of an existing property. The loan may be disbursed in stages as the renovation progresses.
Construction financing typically requires a higher down payment and may have higher interest rates than traditional real estate loans due to the higher risk involved. Borrowers may also need to provide detailed construction plans, budgets, and timelines as part of the underwriting process.