What type of financing is a construction loan?

A construction loan is categorized as interim financing for development. This type of financing is specifically designed to cover the costs associated with the construction of new buildings or major renovations. Generally, construction loans are short-term loans that provide the necessary funds to finance the construction phase before long-term financing is obtained.

During the construction period, the borrower typically draws on the loan as needed, making interest-only payments based on the amount borrowed until the project reaches completion. Once the construction is finished, borrowers often transition to a permanent mortgage to fund the remaining balance.

This differentiates construction loans from long-term financing for property purchases, which is more stable and intended for fully developed properties. Additionally, it's distinct from financing for purchasing existing buildings or public financing for community projects, as those can involve longer-term commitments or specific community-oriented funding sources.