What type of loan is typically used by a builder to finance the construction of a spec home?

A construction loan is specifically designed to finance the building of a new home or the renovation of an existing property. This type of loan is typically short-term and provides the necessary funds to cover the costs associated with construction, including materials, labor, and permits. Unlike traditional mortgages, which are used to purchase completed properties, construction loans are disbursed in stages or draws according to the progress of the construction project.

Builders often utilize construction loans for spec homes because these loans are structured to meet the cash flow needs of a construction project. The builder can access funds incrementally, which helps manage expenses throughout the building process. Once the home is completed, the construction loan may be converted into a permanent mortgage, or the builder may sell the home to pay off the loan.

Other types of loans, such as wraparound or blanket loans, serve different purposes and are not specifically tailored for this type of financing. A wraparound loan involves one loan that "wraps around" another existing mortgage, while a blanket loan is typically used to finance multiple properties under a single mortgage. A graduated loan is designed for borrowers expecting their income to increase over time, which does not align with the construction financing needs for a spec home.