How Does a Construction Loan Work?

Video Transcript

"This is financial adviser Patrick Munro talking about how does a construction loan work? A construction loan is a very popular loan during boom times when a lot of building is going on both residential and consumer not so much during the time when there is a recession but construction loans take the shape in two ways. Construction loans start off with a building loan which has a serious of draws. What a builder does is they get a cost on erecting a new building and what happens is they get money from the bank in small increments based on a draw schedule. It is called a draw schedule and the draw starts with the foundation then when the walls go up there are various inspections that occur as the roof goes on and finally the final inspection when the final draw is given and usually it is four to five draws. Once that interim construction loan is in place the permanent construction loan comes along. It is called a take out mortgage and it is a permanent mortgage going forward. This is Patrick Munroe talking about the processes of construction loans."