Definition of construction mortgage

interim loan covering construction and development costs, secured by a mortgage on the property financed. Also called a construction loan. Funds are advanced at specific stages of construction, in so-called progress payments, with a portion held back until completion of the project, a certain percentage of the building has been leased, or other criteria have been met. Construction financing is paid off from the proceeds of a permanent mortgage by an institutional lender, for example a life insurance company or pension fund or bank. However, some lenders have made construction loans on speculation, without a firm commitment by a take-out lender. Many of these construction loans financing speculative real estate developments have, as a result, become long-term permanent mortgages on the books of the original lender.