Construction Loan
A construction loan is short-term financing that funds the building or major renovation of a property. Instead of paying out the full amount at closing, the lender releases funds in stages, called draws, as work is completed and inspected, and the borrower usually pays interest only on the amount drawn.
Why a construction loan matters
Construction loans carry more risk than loans on finished properties, because there is no income yet and the collateral is only partly built. Lenders focus on the budget, the construction schedule, the contractor, the sponsor's experience and the expected value on completion.
The draw process is how the lender manages that risk. Each draw request is checked against the budget and the work completed, often with a third-party inspection and lien waivers from contractors, before funds are released.
Construction loans are usually repaid by a permanent loan or a sale once the property is complete and stabilized.
Construction Loan vs. Bridge Loan
A construction loan funds ground-up building or major rebuilding, with funds released in draws against a detailed budget. A bridge loan finances an existing property through a lighter transition, such as renovation or lease-up. Both are short-term, but construction loans carry more completion risk.
How Smart Capital Center supports construction lending
Smart Capital Center's AI agents check each draw request against the approved construction budget the team uploads, track spending by budget line and flag overruns and missing documents for the lending team.
Frequently asked questions
How do construction loan draws work?
The borrower submits a draw request listing the work completed and costs incurred, with invoices and lien waivers. The lender or its inspector confirms the work, checks the request against the budget and holds back retainage if required. Approved funds are then released, usually to the borrower or directly to contractors.
What is loan-to-cost on a construction loan?
Loan-to-cost divides the loan amount by the total project cost, including land, hard costs and soft costs. Construction lenders use it to set how much of the project they will fund and how much equity the sponsor must contribute, which usually goes in before loan funds are drawn.
How is a construction loan repaid?
Most construction loans are repaid when the finished property is refinanced with a permanent or bridge loan, or when it is sold. Some construction loans convert directly into permanent financing once the property meets set conditions, such as completion and a minimum level of occupancy.