re: Can someone help me understand how construction loans work?

Other answers have told you correct. Couple pieces of advice. First, if this is truly a spec tread lightly. With interest rates today those holding costs will eat directly into your bottom line so you need to build/sale quick. Second, have a chunk of cash in hand when you start so you can cash flow each phase. For a $170K build I’d want maybe $20K cash. This allows me to pay off one sub/material/phase and roll the next in there and not have to wait on the bank. Do some math with your interest rate/borrowed total and you’ll quickly realize that each day of delay is costing you hundreds of dollars.