What is a Construction Loan?

A construction loan allows builders of homes and commercial structures access to funds necessary for building. A construction loan supplements the amount that a builder put forward to finance a project. This allows the builder the ability to use their excess capital in other building projects.

Loan to Cost

One form of a construction loan is a loan to cost. This type of loan assigns a percentage of the cost of construction to the builder, usually 15 percent. This provides a way for the builder to establish an interest in the outcome of the construction by making them liable.


Many lenders to ensure that a builder uses funds in order to complete the building use a draw. The draw works by requiring the builder to apply for the funds needed for a construction project at the time of the project. The builder is limited to only the amount needed for the given phase of construction and no more.