U.S. Mortgage Index

Construction loan

Definition

A construction loan is financing used to build a home. Funds are typically advanced as work progresses, and the loan is often refinanced into a permanent mortgage when construction is finished.

In plain English

A construction loan pays for building, not for buying an already-finished house in the usual way. Lenders commonly release funds in stages as work is completed. When the home is finished, many borrowers replace the construction loan with a longer-term mortgage. That later loan is a separate origination.

Technical definition

The CFPB consumer glossary describes construction loans as financing used to build a home. Construction-to-permanent structures are related patterns, not a different definition of this product.

Why it matters

Construction financing has a different draw and collateral story than a purchase mortgage on an existing dwelling.

Sources reviewed