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Construction loans are financial instruments that are used to finance real estate construction.

Residential Construction Loans

In the residential real estate market, there are two ways to finance construction:  1) via two loans, an initial construction loan that covers the construction period and a follow-on permanent loan that is used to pay off the construction loan; or 2) via a construction-to-permanent loan where the construction loan is converted to a mortgage after the certificate of occupancy is issued.

residential construction project
A construction worker reviews plans outside of a residential construction site.  Unfinished homes receive finishing touches before new residents move in.  Soon this site will be full of grass, trees, and warmly lit windows as neighbors move in and call this new neighborhood home.  The noise of construction will be replaced with the sounds of nature and children playing.

In both cases, the construction of the home is financed by the construction loan, which the lenders pay out in stages as the builder needs funds.  The lender must, therefore, monitor the builder's progress, which is one reason why fees on construction loans are higher than on conventional loans.  During the construction period, you'll typically have to pay interest-only payments based on a variable rate.

Watch:  Rotating Collage of Construction Concepts

For home buyers that are planning to sell their current home once their new home is built, a bridge loan may be a good option.  In residential real estate, bridge loans are used to span the time between when buyers buy a new home and when they can sell their old home.  When paired with a construction loan, the bridge loan can be used as a down payment.  To find rates on construction loans and bridge loans, check out hsh.com.  For more information about construction loans and answers to frequently asked questions about these loans, visit the Mortgage Professor.

Commercial Construction Loans

Two common types of loans in the commercial real estate market are acquisition and development loans and construction mini-perm loans.  Acquisition and development loans are long-term, fixed-rate loans that can be used to acquire and develop fixed assets such as land or a building.  Construction mini-perm loans are typically used to finance the construction of income-generating properties that need to establish an operating history before the owner can qualify for long-term financing.  Mini-perm loans typically last between three and five years; they are often used to finance construction of shopping centers, office buildings, industrial properties, and large apartment complexes.  For more information or to check out commercial construction loan rates, visit C-Loans.com or BusinessFinance.com.

commercial construction project
Concrete, metal, and wood rise several stories into the sky, as an unfinished commercial building is constructed.  A yellow crane perches atop the construction site.  Day by day, the construction site is transformed.  Soon the construction site will be replaced by a completed building.

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