finance
construction loan
A construction loan is short-term financing used to pay for building a new structure or major renovation. Instead of a lump sum, funds are released in stages, called draws, as work is completed and inspected. Borrowers often pay interest only on funds drawn. When construction is finished, the loan is typically paid off by a permanent loan, sometimes called a takeout loan, or converted into one.
- Exam tip
- Construction loans are short-term and disbursed in draws. The permanent or takeout loan replaces it after completion.
- Example
- A builder's $400,000 construction loan releases $100,000 after the foundation passes inspection and more as framing and roofing are done.
Related terms & state variants
Sources
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Last verified: 2026-10-23