Are you thinking of investing in new real estate properties? New as in “not yet built?” Investing in new construction invokes the same principles as investing in existing properties yet still provides significant opportunities for the right project. But if you’ve never purchased or financed a home before it’sfinancing process for new homes even constructed, the financing process is a bit different.

When you apply for a construction loan, the bank reviews the plans and specifications provided by the builder. Based upon those figures, an appraisal is ordered to confirm the builder’s estimate. Most construction loans require at least a 20 percent down payment but if the buyer already owns the lot the home will be built upon, usually the land is enough to cover the 20 percent equity requirement.

Say that the construction cost is $175,000. That’s for everything which includes funds allocated for labor and materials but also all permits that will be needed along the way. There will also be an amount set aside for “change orders” that increase the cost of construction along the way.

But the bank won’t hand over the $175,000 to the builder. No, instead, the funds will be doled out in stages by the lender’s fund control department. Some banks will advance funds to start construction but most will operate on a reimbursement schedule. Either way, no funds are released in bulk.

Upon submitting the building schedule to the bank, construction is listed in phases. For example, “lot clearing” might consist of 10 percent of the total work. Stem walls 15 percent and plumbing/electrical 20 percent and so on. As each phase is completed, the builder contacts the bank who will send out an inspector to verify the completed work and funds will then be released to cover the just completed stage. At the end of completion, the bank will send the inspector one last time then issue a certificate of occupancy. Once the loan funds have been completely disbursed and the construction finished, the borrower must then replace the existing construction loan with a permanent mortgage.