A short-term loan that pays for building or renovating a property, advanced in stages as work is finished and repaid from a sale or a permanent loan.
The real estate lending rule defines a construction loan as an extension of credit for the purpose of erecting or rehabilitating buildings or other structures, including any infrastructure necessary for development. The lender does not hand over the full amount at closing. It funds draws as work is completed and inspected, so the balance climbs over the build.
The interagency guidelines set supervisory loan-to-value limits by type: 80 percent for commercial, multifamily and other nonresidential construction, and 85 percent for 1- to 4-family residential construction. Each bank also sets a loan-to-cost limit of its own.
The OCC handbook says the term is generally based on the time needed for construction and stabilization or sale, and would not be shorter than the time needed to finish.
Expect a lender to ask for the budget, the plans, the construction contract, proof of your cash equity and the repayment source: unit sales, a lease-up and refinance, or a take-out commitment.
How it shows up in the data here
Bank call reports show construction and land balances held on the report date, split into 1-4 family construction and other construction and land. See the largest books at construction books or filter lenders flagged for construction. There are no loan-level construction records for banks, so loan sizes, rates and terms are not here. Credit unions report construction loans made in the period.
Go further
- Construction lenders by state: Banks and credit unions with construction lending on their books.
- Loan-to-value and loan-to-cost calculator: Check a loan amount against value and against cost.
- LTV and LTC calculator: Loan to value and loan to cost, the equity a lender will ask for, and the federal supervisory limit for the property type.
- Maximum loan calculator: The loan each test allows: DSCR, LTV and debt yield side by side, and which one binds.
- Construction loan package checklist: A construction lender is lending against a building that does not exist yet. The package has to show what it will cost, who will build it, where every dollar comes from, and how the loan gets repaid when it is done.
- Supervisory loan to value limits and HVCRE, explained: Two federal rules shape how much a bank will lend against real estate: a table of loan to value ceilings, and a capital rule that makes some construction loans cost the bank more to hold.
Related terms
- Construction draw: One advance of construction loan money, released after the lender confirms that the work it pays for is in place.
- Interest reserve: An account set up by the lender that pays the loan's interest during construction and lease-up, usually funded as a line in the loan budget.
- Loan-to-cost ratio (LTC): The loan amount divided by the total cost of a project: the property plus all construction costs. It shows how much of the budget the lender funds.
- Take-out loan: The permanent loan that pays off a construction loan, or the commitment from a lender to make that loan once the project is finished and leased.
- Mini-perm: A medium-term loan, shorter than a permanent loan, that a bank makes on a finished property so the owner has time to lease it up before long-term financing.
- As-complete value: An appraiser's estimate of what a property will be worth on the date construction is expected to be finished.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.