Georgia MLS Practice Exam 2025 – Complete Preparation Tool

A construction loan is typically an interim financing option that provides the funds needed to build a property. It is designed to cover the costs incurred during the construction phase. The correct answer emphasizes the nature of this type of loan as a temporary solution, often with a take-out commitment for permanent financing once construction is complete. This means that once the building project is finished, the construction loan can be converted into a permanent mortgage that will pay off the short-term loan.

The structure of a construction loan is intended to facilitate the transition from the construction phase to long-term home financing, which is why a commitment for a permanent loan is often associated with it. Such a commitment offers assurance to the borrower that they will be able to secure long-term financing after the construction is completed, addressing the typical concern of needing a stable loan once the project transitions to occupancy.

In contrast, a long-term loan refers specifically to mortgages used after construction is completed, which does not align with the purpose of a construction loan. Purchasing existing homes is not the intention of a construction loan; it is for new builds or major renovations. Lastly, the idea of a personal loan without collateral does not accurately depict a construction loan, as construction loans are typically secured by the property being built.