What is a construction loan? can be a long process. Whether you’re building on new land, doing a major renovation or even just doing a moderate renovation on an existing house, it can take anywhere from 12 to 18 months. If you don’t have enough cash to pay for all of it out of pocket, a construction loan may be the best option for you.

There are many different types of construction loans. For example, you can get a traditional construction loan, an FHA construction-to-permanent mortgage or a VA construction loan for eligible veterans. It’s important to understand the different options before you apply.

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To qualify for a construction loan, you’ll need to meet the lender’s requirements. These can vary but usually include a large down payment, a solid credit history and a low debt-to-income ratio. You’ll also need to work with a reputable contractor and architect to create a construction plan, including costs, timelines and budgets.

When you take out a construction loan, your lender won’t disburse the full amount upfront like they would with a purchase money mortgage. Instead, they’ll release small amounts of funds over the course of the construction phase. This is known as a draw schedule. Each time the lender releases funds, they’ll send an inspector to the site to check on progress and approve the next stage of work. You’ll only be charged interest on the funds that are actually disbursed during the construction process. Once construction is complete, you’ll repay the loan or convert it to a mortgage.