What Is A Construction Loan?

Construction loan
Building a custom home with a construction loan is a viable option in the current market.

For several years now, home buyers have had to contend with a low inventory of homes for sale. Of course, a byproduct of this has been home prices remaining high as well. As a result, more buyers have had to consider obtaining a construction loan to build a new home instead. As it’s name implies, a construction loan is designed to fund the cost of building a custom home. It is not technically a mortgage, however a mortgage will be required to pay off the construction loan upon completion of the home.

The construction loan process

Applying for a construction loan is a similar process to applying for a mortgage. Upon qualifying for a construction loan, these funds can be used to purchase land, building materials, labor costs, and even permits. Once construction of the home has been initiated, you will be able to access these funds or draws as you reach various phases of the home build. Upon completion of the home build, a certificate of occupancy will be issued upon the final inspection. At this time, the loan can be converted to a traditional home loan that you will be paying each month. As with any home loan, there are various programs and terms that you can choose from.

Typically, construction loans are short-term loans that only require interest payments with the balance being paid upon completion of construction. As for the rates on construction loans, these are typically variable rates that are dependent on the prime rate. Therefore, they tend to rise or fall accordingly. As with any loan, your credit score and history will determine your rate.

Types of construction loans

  • Construction-only: This loan is typically only issued for a year and covers the project’s build phase only.
  • Construction-to-permanent: Similar to a construction-only loan, the borrower will only pay interest on the loan. Upon completion of the build, this loan will convert to a permanent mortgage.
  • Owner-builder: This is similar to a construction loan, however it utilized for borrowers that tend to build the home themselves. In these cases, the borrower must be able to demonstrate that he/she is capable of building the home.
  • Renovation: Also referred to as a FHA 203(k) loan, this loan is backed by the Federal Housing Administration and allows you to completely renovate a property.
  • End Loan: This type of loan is used after the home has been constructed and is more similar to a traditional mortgage.


As mentioned previously, the persistently tight inventory of existing homes for sale has been quite frustrating for many buyers. With this said, finding either a vacant lot to build on or purchasing a “tear down” house to construct a new home may be a viable option. Of course, this approach can be quite expensive and will certainly test your patience. Nonetheless, a construction loan may be a great solution.

Are you looking to buy or sell a home in the South Florida market? We can help! Contact Natasha at Live South Florida Realty, Inc. today! Also, don’t forget to download the free Florida Home Search app for your mobile device.

By natasha moore

REALTOR® with Live South Florida Realty, Inc.