What does a construction loan provide?

A construction loan is specifically designed to provide funds to build a home or other structure and is disbursed at various stages of the construction process. This type of financing is structured so that the lender releases funds incrementally as the project progresses, which helps ensure that the funds are used specifically for their intended purpose—financing the construction work itself.

This method of releasing funds, often called "draws," aligns with the completion of certain milestones in the construction schedule. For example, a portion of the loan might be disbursed when the foundation is laid, with subsequent amounts available as framing, roofing, and other stages of construction are completed. This approach reduces the lender's risk by ensuring that they are providing funds only as work is verified and completed.

In contrast, options such as purchasing a primary residence or paying a lump sum before construction starts do not accurately reflect the typical function of a construction loan. Additionally, while covering land purchases can be a part of the overall financing for a project, it does not encapsulate the primary purpose of a construction loan, which is to fund the actual building process.