Construction lenders really do start from the ground up. Most construction loans are issued by retail banks and monitored throughout the construction process by a fund controller and an inspector. And they also require at least a 20 percent down payment at the outset. With mortgages on existingconstruction loan basics properties, the lender automatically has collateral of value—the home.

With construction, there may be very little value if only the lot is being counted as equity, and then it may not be enough. A bank can place a lien on a vacant lot as part of the buyer’s equity but if the buyers don’t yet own the lot and want to finance the lot acquisition as well as the construction costs a down payment will be required.

The bank will approve both the builder as well as the buyers. The bank will evaluate the builder’s track record, credit report and references. If the builder doesn’t mass muster, the buyers must find another builder, usually one on the bank’s preapproved builder list to save time. Once the builder is approved, the loan application is also reviewed. Just like any other type of real estate financing, credit, income and sufficient assets will be verified.

An appraisal is ordered to make a determination how much the property will be worth once the project has been 100 percent completed. This is the so-called “subject to” valuation. Upon approving both the appraisal and the buyers, the construction loan is approved. Construction funds are handed out in phases, called draws, to the builder as the property is being built. Some banks hand out funds as a percentage of work completed while others will issue draws based upon specific work being finished. Either way, at the end of construction, a final inspection will be ordered to determine the home is ready to occupy. At this stage, the construction loan is replaced by a permanent one.