Construction Loan
A Construction Loan is a short-term loan used to finance the building or renovation of a residential or commercial property. It covers the cost of land, labor, materials, and permits, and is typically replaced by a long-term mortgage or commercial loan once construction is complete.
Residential Construction Loan
Used for: Building or renovating single-family homes, townhomes, or small multifamily properties (typically 1–4 units).
| Category | Details |
|---|---|
| Loan Size | Typically $100K–$2M |
| Property Type | Owner-occupied homes or investment properties (1–4 units) |
| Loan Term | 6 to 24 months (short-term) |
| Repayment | Interest-only during construction; then refinanced to a mortgage |
| Approval Focus | Borrower’s personal income, credit score (usually 660+), and down payment |
| Down Payment | Usually 20%–25% |
| Disbursement | Draws released after inspections tied to project milestones |
| Exit Strategy | Converts to a long-term mortgage (construction-to-permanent), or sell upon completion |
Commercial Construction Loan
Used for: Building or renovating office buildings, retail centers, warehouses, apartments (5+ units), hotels, etc.
| Category | Details |
|---|---|
| Loan Size | $500K to $100M+ |
| Property Type | Income-producing commercial real estate |
| Loan Term | 12 to 36 months (sometimes longer) |
| Repayment | Interest-only during construction; balloon payment or refinance into permanent commercial loan |
| Approval Focus | Project feasibility, borrower experience, business plan, tenant commitments (pre-leasing), and DSCR |
| Down Payment | 25%–35% (sometimes lower with SBA or HUD programs) |
| Disbursement | Based on third-party inspections, lien waivers, and performance milestones |
| Exit Strategy | Lease-up then refinance with permanent commercial mortgage, or sale to investor |
Key Differences Summary:
| Feature | Residential | Commercial |
|---|---|---|
| Loan Size | Smaller ($100K–$2M) | Larger ($500K–$100M+) |
| Borrower Type | Individual (homeowner/investor) | Developer, investor, LLC, Corp |
| Approval Based On | Personal income, credit, and assets | Project cash flow, DSCR, and experience |
| Regulations | Consumer lending laws apply | Commercial lending – fewer consumer protections |
| Exit Options | Permanent mortgage or sale | Refinance, sale, or commercial lease-up |
Common Construction Loan Types:
Construction-to-Permanent (One-Time Close)
Converts to a regular mortgage after construction
Single closing, lower costs
Construction-Only (Two-Time Close)
Separate loans for construction and permanent financing
More flexibility but higher closing costs
Owner-Builder Loan
For borrowers who are also the licensed builder
Rare and requires proof of construction experience
Renovation Loan / Rehab Loan
For major remodels or additions
Examples: Fannie Mae HomeStyle®, FHA 203(k)
Documents & Requirements:
Construction plans and permits
Detailed budget/cost breakdown
Licensed contractor agreement
Timeline of construction phases
Down payment and income documentation
Good credit and reserves
Ideal Candidates:
Real estate investors or developers
Homeowners building custom homes
Buyers purchasing fixer-uppers with major renovations
Terry Kwon
Ph: (631) 624-4480
Licensed Mortgage Originator
NMLS #2620208
