Construction loans and land loans are part of a transaction where the buyer is buying the land separately from the cost for having the house built. This occurs when the builder you are using does not already own the plot of land that the house is being built on.
In many cases the builder already owns the land the house is going to be built on, however, not all builders will. Banks are prepared for these types of situations and offer construction loan packages which include a land loan and a construction loan that is rolled up into one loan/payment after the Closing.
Construction loans are typically structured in a way where funds are disbursed at set times, when certain milestones are met. For example, the land loan may be paid immediately so the land has been purchased. The builder will also get funds after the foundation is poured, perhaps after the framing is done, etc.
Construction loans can vary greatly and that is why it is important to know what the terms of the construction loan are and make sure the builder is comfortable with the funds distribution.
Most builders know how construction loans work, however, they may not know the specific terms of your construction loan and/or land loan and that is why it is important to consult with your specific builder prior to deciding which construction loan you are going to go with.
