How does a construction loan work?
By AbeAugust 12, 2026Construction Loans
Short Answer
A construction loan finances an approved building project in stages. Instead of advancing the entire amount at once, the lender releases funds through draws as verified work is completed.
Full Detailed Answer
Before closing, the lender reviews the borrower, land, plans, specifications, budget, builder, contract, permits, appraisal based on the completed project, and contingency reserves. During construction, inspections support draw requests and confirm progress.
Payments during construction are often based on the amount disbursed, although terms vary. Cost overruns, change orders, delays, and unpaid contractors can create serious problems, so the budget and draw process must be understood before work begins.
Some loans cover construction only and require separate permanent financing. Others are construction-to-permanent loans that convert after completion, subject to their terms.
What Abe Will Review
- Land ownership or purchase
- Plans, budget, builder, and permits
- Draw and inspection schedule
- Permanent financing and contingency
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