Construction Loan
A construction loan funds ground-up development or major rehabilitation, disbursed in draws as work is completed rather than as a lump sum. Loans are sized by loan-to-cost (typically 75–85% maximum) and projected as-stabilized value, with interest paid only on funds drawn. Most convert to or are replaced by permanent financing at completion.
Lenders control risk through the draw process: inspections verify completed work before each disbursement, and a contingency reserve (typically 5–10% of hard costs) absorbs overruns.
Construction lenders typically require recourse — personal guarantees including completion guarantees — because an unfinished building is poor collateral.