What is the purpose of a construction loan?

The purpose of a construction loan is specifically to provide the necessary funds to finance the building of new properties. This type of loan is designed for borrowers who are constructing a new home or a commercial building, and it typically covers costs associated with raw materials, labor, and other expenses incurred during the construction phase. These loans are often short-term, with the expectation that they will be converted into a more permanent financing solution, such as a mortgage, once construction is complete.

This distinguishes construction loans from other types of loans meant for purchasing existing properties or refinancing debt, as they are tailored to cover the specific needs and risks associated with the construction process.