A construction loan is a short-term, interim loan to pay for the building of a real state property. As work progresses, the lender pays out the money in stages.
Construction loans are typically short term with a maximum of one year and have variable rates that move up and down with the prime rate. The rates on this type of loan are higher than rates on permanent mortgage loans. To gain approval, the lender will need to see a construction timetable, detailed plans, and a realistic budget, sometimes called the “story” behind the loan.
Once approved, the borrower will be put on a bank draft, or draw, schedule that follows the project’s construction stages and will typically be expected to make only interest payments during construction. As funds are requested, the lender will usually send someone to check on the job’s progress.