What characterizes a construction loan?

A construction loan is characterized as a short-term loan specifically intended to finance the expenses associated with building a structure or making significant improvements to real estate. These loans typically cover the costs of materials, labor, and other related expenses required during the construction phase. They are usually disbursed in stages or "draws" based on the progress of the building project, ensuring that funds are available as needed while minimizing borrowing costs.

The key aspect of construction loans is their temporary nature, often ranging from a few months to a couple of years, and their purpose is distinctly focused on the construction process rather than on long-term financing or the acquisition of an already developed property. This differentiates construction loans from long-term loans used for property acquisition or loans associated with purchasing renovated properties, which are typically intended for more permanent financing solutions. Additionally, construction loans are not grants; they require repayment and are therefore not applicable to funding methods focused on sustainable development projects without the expectation of financial return.