What is the purpose of a builder's or construction loan?

The purpose of a builder's or construction loan is to provide financing specifically for the process of building a home or other structures, with funds being advanced in stages as construction progresses. This type of loan is tailored to meet the unique needs of a construction project, allowing the borrower to access funds at various phases of the build, such as after the foundation is laid, after framing is completed, and so on. This staged financing approach ensures that the funds are utilized effectively and that the construction project can move forward without financial interruptions.

This is different from other financing options, such as a loan that simply covers the cost of purchasing land, financing renovations, or paying off existing mortgages, which do not specifically cater to the incremental funding needs associated with new construction projects.