Construction or hard money loans are short-term loans used to finance and cover the costs of the project before obtaining long-term funding. Construction loans are considered risky and usually have higher interest rates than traditional long-term loans.
Construction loans are taken out by builders and are typically short-term loans, often for only one year. After construction on the project is complete, the borrower can either refinance the construction loan into a permanent loan or get a bridge loan. The loan requires interest-only payments while the project is under construction.
Most lenders require a 20 - 25% minimum down payment on construction loans. Approval for a construction loan requires the borrower giving the lender a comprehensive list of construction details from a qualified General Contractor who is deeply knowledgeable about the project.