Construction Loan Mortgage Terms Glossary

After-Repair Value (ARV)

The projected market value of a property after planned renovations are completed. Used by fix-and-flip and rehab lenders to size the loan and underwrite the deal. ARV is supported by an appraisal that includes the cost and scope of the planned work and comparable sales of recently renovated homes.

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Certificate of Occupancy (CO)

A document issued by the local government certifying that a newly built or renovated structure meets building codes and is legally habitable. Required on new construction before the permanent mortgage can close. FHA and VA loans may require a certificate of occupancy for new construction transactions.

Construction Draw Schedule

A predetermined timeline showing when construction loan funds will be disbursed to the borrower or builder based on completion of specific construction milestones. Each draw is typically verified by a lender inspection before funds are released. Common milestones include foundation completion, framing, rough mechanicals, drywall, and final completion. Failure to complete milestones on schedule can delay draws and construction.

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Construction Loan

A short-term loan used to finance the building of a new home. Funds are disbursed in draws as construction progresses and interest accrues only on the amount drawn. When construction is complete, the loan is typically converted to a permanent mortgage or repaid by a new long-term loan.

Construction to Permanent Loan

A financing structure that starts as a construction loan and automatically converts to a permanent mortgage when construction is complete. Also called a one-time-close or single-close construction loan. Eliminates the need for a second closing and a second set of closing costs. Interest-only payments are made during construction; fully amortizing payments begin after conversion.

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Distressed Property

A property in physical disrepair, financial default, or under foreclosure that is typically available at below-market pricing. Distressed properties attract investors seeking value-add opportunities but require careful due diligence on repair scope and costs. Financing options are limited since most conventional programs require the property to be habitable at origination. Hard money and bridge loans are common for distressed acquisitions.

Draw

The act of accessing funds from a revolving credit line such as a HELOC or a construction loan disbursement. On a HELOC, draws can be made anytime during the draw period up to the credit limit. On a construction loan, draws are requested at specific construction milestones and verified by the lender.

Fix and Flip Loan

A short-term loan used by real estate investors to purchase and renovate a property for resale. Typically a bridge loan with higher rates and shorter terms than conventional financing. Qualification is based primarily on the property's after-repair value (ARV) and the investor's track record.

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Hard Money Loan

A short-term, asset-based loan secured primarily by the property's value rather than the borrower's creditworthiness. Used by investors for fix-and-flip deals, bridge financing, or properties that do not qualify for conventional financing. Higher rates and fees than conventional loans. Funded by private lenders or investor groups rather than banks.

House Flipping

The strategy of purchasing a property below market value, renovating it, and reselling it quickly for a profit. Fix-and-flip investors typically finance acquisitions with hard money loans or bridge loans given the short hold period. Profit depends on the accuracy of the after-repair value estimate, renovation costs, and timeline. Subject to short-term capital gains tax if held less than one year.

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Land Acquisition Loan

A loan to purchase raw land. Typically harder to finance than a home purchase because land has no income-producing potential and is considered a higher risk by lenders. Often requires a larger down payment (30 to 50%) and shorter term than standard mortgages. Often used as the first step before a construction loan.

Loan-to-Cost Ratio (LTC)

The ratio of the loan amount to the total cost of a real estate project, including acquisition, construction, and soft costs. Used in construction and bridge lending. If a project costs $1,000,000 total and the lender provides $750,000, the LTC is 75%. Different from LTV, which compares the loan to the completed or current market value rather than the cost.

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Mechanic's Lien

A legal claim against a property filed by a contractor, subcontractor, or material supplier who performed work or provided materials that were not paid for. Mechanic's liens must be recorded within a statutory period after work is completed. They can cloud the title and block a sale or refinance until satisfied. Lien waivers from contractors protect buyers and lenders from undisclosed construction claims.

Modular Home

A factory-built home constructed in sections and transported to the site where it is assembled on a permanent foundation. Unlike manufactured homes, modular homes meet local building codes rather than HUD standards. Financed like site-built homes once on a permanent foundation. Construction loans are available during the build phase.

Owner-Builder

A construction loan structure where the property owner acts as their own general contractor rather than hiring a licensed builder. Harder to finance because most construction lenders require a licensed general contractor with verifiable experience. Owner-builder loans carry higher perceived risk of construction delays, cost overruns, and quality issues. Some lenders offer owner-builder programs with additional requirements.

Plans and Specifications

The architectural drawings, engineering documents, and written descriptions that define the scope, materials, and methods for a construction project. Required by lenders when approving construction loans. The appraiser uses plans and specifications to complete the as-completed appraisal that determines the construction loan amount and the eventual permanent mortgage amount.

Punch List

A list of items requiring completion, correction, or repair compiled during the final walkthrough before a new construction home is accepted. Common punch list items include paint touch-ups, fixture adjustments, door alignment, and minor finish defects. Lenders may require completion of all punch list items and a certificate of occupancy before releasing final construction draws or converting to a permanent mortgage.

Single-Close Construction Loan

A construction-to-permanent loan that closes once and converts to a permanent mortgage when construction is complete, eliminating the need for a second closing and second set of closing costs. Available for FHA, VA, USDA, and conventional programs. The VA single-close construction loan allows eligible veterans to build with no down payment.

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