There are two loans involved in financing most new construction: The PERMANENT and the CONSTRUCTION (INTERIM)LOAN.

1. The buyer immediately applies for a PERMANENT LOAN from a bank, credit union or mortgage company, just as if he were going to close on an existing home. The basis of the loan is the appraised value of the new home, which the appraiser determines by using the plans and specifications of the new home and valuing it AS IF it were already built. After the PERMANENT LOAN is processed, underwritten and approved, the permanent mortgage lender writes a LETTER OF COMMITMENT stating that permanent financing will be provided as soon as construction is confirmed by the appraiser's FINAL INSPECTION REPORT, which verifies that the house was indeed built per appraised plans and specs.

2. The buyer takes the LETTER OF COMMITMENT to a construction lender (most often a bank). Based on a permanent lender's commitment to "take out," or pay off the INTERIM LOAN when the house is completed, the construction lender makes short term loan (approximately six months) allowing the builder to buy the property, purchase materials, and pay his employees and his subcontractors. At this stage of the construction process, the builder typically takes title to the property, with the interim loan made to him rather than the buyer. (If the buyer takes out the interim loan himself or owns the land already then the buyer stays in title on the land and pays the builder to purchase materials, and pay his employees and his subcontractors.) The construction lender is concerned not only with the buyer's financial stability but also the builder's ability to finish the house satisfactorily within the allotted time. The lender is also concerned with any and all title considerations relating to the property. Do not have any work done on the property prior to the construction loan. It can "cloud" the title. Liens can be filed up to six months after any work has been completed. Do nothing until you get your construction loan in place!

THINGS TO WATCH FOR: Since very few people have suffficient income to qualify for two home mortgages at once, it is generally the case that the buyer, to qualify for the construction loan, must have sold or leased their current residence, if any. Furthermore, if the buyer is using equity from the sale of an existing home as the down payment on the new home, the former home will have to close before work on the new home can begin.

The buyer should also keep in mind that required veification documents-credit report, employment verification, verification of funds, etc.-expire after 90 days. So the buyer should keep their financial condition unaltered during the construction period, and should have the permanent lender update and re-
underwrite the verifications prior to the conmpletion of construction. When the home is completed, as verified by the FINAL CONSTRUCTION REPORT, the PERMANENT LOAN will pay off (take out) the INTERIM LOAN.