A construction mortgage (also called a construction loan) is a short-term, high-interest loan used to finance the building of a new home or significant renovation of an existing property. Unlike traditional mortgages that disburse funds in a lump sum, construction mortgages release funds in stages—known as draws—as the project progresses.

These loans are typically used to cover costs such as:

• Land acquisition

• Building materials

• Labor

• Permits and inspections

• Major structural renovations

• Construction-to-Permanent Loan. This loan starts as a construction loan and automatically converts into a traditional mortgage once the home is complete.
• Stand-Alone Construction Loan. This is a short-term loan used only for the construction phase. Once the home is complete, the borrower must apply for a separate mortgage to pay off the construction loan.
• Owner-Builder Construction Loan. Designed for borrowers who plan to act as their own general contractor.
• Renovation Construction Loan. Used for major renovations or rebuilding projects. These are often bundled into a traditional mortgage and can include programs like the FHA 203(k) loan.

Construction mortgages are disbursed in stages, typically tied to project milestones such as:

1. Site preparation

2. Foundation

3. Framing

4. Plumbing/electrical

5. Interior finishing

6. Final inspection

After each stage, an inspector verifies the work before the next disbursement is released. Borrowers generally make interest-only payments during construction, based on the funds drawn so far.