Construction financing is a short-term loan used to fund the building or major renovation of a property. These loans are typically replaced by a mortgage once the construction is complete.
Eligibility:
Borrower must have strong credit (usually 680+).
Detailed construction plans and cost breakdown required.
Licensed contractor involvement is typically mandatory.
Substantial down payment (usually 20–25%).
Adequate income to cover payments during construction.
Benefits:
Covers land, labor, materials, permits, and more.
Allows customization of a home or building from the ground up.
Funds released in stages based on construction progress.
Can convert to permanent mortgage after construction.
Pros:
Total control over design and features of the property.
Interest-only payments during construction phase.
One-time close options simplify financing process.
Increases property value by building to personal or commercial specs.
Cons:
More complex approval process than traditional loans.
Risk of delays or budget overruns, which can impact financing.
Higher interest rates than standard mortgages.
Loan disbursement in phases requires regular inspections.
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