Here are some key points to know about construction loans:

Phases of Funding: Construction loans are typically disbursed in stages or phases to match the progress of the construction project. Funds are released at specific intervals, often referred to as "draws," as various milestones are achieved, such as completing the foundation, framing, roofing, and finishing.

Short-Term Nature: Construction loans are usually short-term loans, with terms ranging from 6 months to 2 years. They cover the construction period and are intended to be replaced by a longer-term mortgage or another form of financing once the project is completed.

Interest-Only Payments: During the construction phase, borrowers often make interest-only payments on the disbursed funds. This helps manage initial costs and keeps monthly payments lower while the project is ongoing.

Variable Interest Rates: Construction loan interest rates are often variable rather than fixed. The rate may be tied to an index, such as the prime rate, and may adjust over time.

Detailed Plans and Budgets: To secure a construction loan, borrowers typically need to provide detailed plans, blueprints, and a comprehensive budget for the project. Lenders want to ensure that the loan amount accurately reflects the estimated construction costs.

Down Payment and Equity: Borrowers are usually required to provide a substantial down payment or equity in the project. This demonstrates their commitment to the project and reduces the lender's risk.

Collateral and Appraisals: The property itself serves as collateral for the construction loan. Lenders often require appraisals at various stages of construction to ensure the project's value aligns with the loan amount.

Construction Process Oversight: Lenders often require a construction manager or inspector to oversee the construction process and verify that the project is progressing as planned before releasing additional funds.

Conversion to Permanent Mortgage: Once construction is complete, borrowers typically convert the construction loan into a permanent mortgage or another long-term financing option. This process is known as the "construction-to-permanent" or "single-close" loan.

Eligibility Requirements: Borrowers need to meet specific eligibility criteria, including creditworthiness, income verification, and a demonstrated ability to complete the construction project.

Construction loans provide essential financial support for those looking to build or renovate properties, enabling them to manage costs effectively throughout the construction process. These loans are an essential tool for individuals, developers, and businesses involved in construction projects of varying sizes and complexity.