Definition: A construction draw mortgage, also known as a builder loan, is a type of financing that provides funds to builders or property owners in stages (or “draws”) during the construction of a property. This type of mortgage supports the completion of new builds, with funds disbursed at key milestones as construction progresses.

Key characteristics

• Staged funding: Funds are released at different stages, such as land purchase, foundation completion, framing, and final inspection.
• Interest and terms: Interest rates and terms may vary by lender. During construction, borrowers typically pay only interest, with principal payments beginning once construction is complete.
• Inspections: An inspection is required before each draw to confirm the completion of that construction stage.

Benefits and who it’s for

Construction draw mortgages are ideal for builders or individuals planning to build custom homes, as they provide funds throughout the construction process. It offers cash flow management for builders while securing the lender’s investment. Once construction is completed, the loan typically converts to a standard mortgage.

Last modified: November 5, 2024