What Are Construction Loans?

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A construction loan is the type of loan that one gets to finance the construction of a new building or buildings. There are two basic kinds of construction loans: home construction and commercial construction. New home construction loans are typically acquired by the homeowner to cover the cost of the builder and building materials. Commercial construction loans are acquired to cover the cost of building commercial or industrial structures.

Typically, the borrower needs to provide specific details about the building that is undergoing construction in order to acquire financing for the venture. The lender needs to ascertain the likelihood that the borrower will be able to repay the loan. If the borrower owns the land that the new home is being constructed on, that fact increases his chances of receiving the loan.

Two basic terms are offered for construction loans: short term or long term. Long-term construction loans offer more flexibility than in the past and provide such terms as 15 or 30-year fixed, interest only loans, and a variety of adjustable rate mortgages.

The short-term loan is in place only as long as it takes to complete the construction and...

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