More Loan Types and Terms

Question 1

What are the potential benefits of seller financing over a conventional lender loan?

Answer 1

Lower interest rates

Longer loan terms

Question 2

How is an installment land contract different from other types of financing?

Answer 2

With this financing arrangement, the seller keeps title and sometimes keeps possession and use of the land as well. After all the payments have been made, the seller transfers ownership of the property to the buyer.

Question 3

What is the advantage of using an option to obtain property?

Answer 3

A developer who options land does not incur any holding costs, such as taxes, insurance, interest and maintenance, until he or she exercises the option. If the economy weakens or the developer believes that the development of the parcel is not feasible, he or she can simply decline to exercise the option.

Question 4

In what situations might the entity that develops the land be different from the entity that does the building on the land?

Answer 4

In the single-family residential home market, where a land company will subdivide large pieces of land and sell packages of lots to individual builders.

In industrial parks, where many of the users have special needs that will require custom-designed buildings.

Question 5

How do construction loans differ from regular financing on an existing structure?

Answer 5

A construction loan is a short-term, interim, or temporary loan usually lasting from 9 to 12 months for a single-family home and 18 to 24 months for a more major project such as an apartment building.

Question 6

What are the two basic kinds of construction loan?

Answer 6

A combination loan, which combines a construction loan with a permanent take-out mortgage and requires only one loan closing.
Ainterim, short-term, straight construction loan, which involves the financing of the construction phase only.

Question 7

Before deciding to do a construction loan, what things will the lender consider?

Answer 7

Plans and specifications 
Breakdown of costs 
Contract 
Repayment plan 
Financial information

Question 8

How are the payments on a construction loan disbursed?

Answer 8

Lenders can disburse funds using the draw method, the percentage-of-progress system (which is a type of draw), the voucher method, or a builder’s control service.

Question 9

What is a take-out commitment?

Answer 9

A promise by the permanent lender that if certain conditions are met, the lender will issue a permanent loan to the borrower once the construction is completed in a satisfactory manner.

Question 10

What is a subordination clause and what must it specify to be enforceable?

Answer 10

An agreement to reduce the priority of an existing loan to allow a new future loan to take a higher priority. To be enforceable, a subordination clause must specify the maximum amount, the maximum rate of interest and the loan repayment terms.

Question 11

What is a rental achievement clause?

Answer 11

A clause that requires the developer-borrower to pre-lease a certain amount of space in the building. To meet this contingency, the developer will give the lender a certified rent roll that specifies who the tenants will be and which space they will be leasing, the length of each lease and the annual rent each of the tenants will be paying.

Question 12

Under what circumstances can a mechanic’s lien be placed on a property?

Answer 12

If the builder does not complete the project or if the job is completed and the builder does not pay those suppliers or contractors who worked on the project.

Question 13

A common method of seller financing is

Answer 13

a purchase-money mortgage in which the seller conveys the title as the buyer simultaneously delivers a mortgage that will secure the note given as partial payment for the land.

Question 14

Sometimes a seller will finance a land sale using an installment land contract instead of a mortgage

Answer 14

With this financing arrangement, the seller keeps title and sometimes keeps possession and use of the land as well, until all the payments are made. Then the seller transfers title to the buyer.

Question 15

A developer who options land does not incur any holding costs, such as taxes, insurance, interest and maintenance,

Answer 15

until he or she exercises the option. If the economy weakens or the developer believes that the development of the parcel is not feasible, he or she can simply decline to exercise the option.

Question 16

Construction Loan

Answer 16

is a short-term, interim, or temporary loan usually lasting from 9 to 12 months for a single-family home and 18 to 24 months for a more major project such as an apartment building.

Question 17

Permanent loans on buildings that already exist are usually written for longer terms, usually 15 to 30 years. When used in combination with a construction loan, a permanent loan is called

Answer 17

Takeout Loan

Question 18

There are two basic kinds of construction loans:

Answer 18

A combination loan, which combines a construction loan with a permanent take-out mortgage and requires only one loan closing.
An interim, short-term, straight construction loan, which involves the financing of the construction phase only.

Question 19

A borrower usually incurs several costs when taking out a construction loan:

Answer 19

A flat loan origination fee, which is usually a percentage of the amount of the loan and is assessed at the time the lender makes the loan.
Fees to cover the expense associated with preparing and underwriting the loan.
Fees to cover the lender’s higher overhead costs for items such as on-site inspections, “progress” advances, and checking for mechanic’s liens.

Question 20

A construction lender will consider a number of factors before agreeing to finance a construction project

Answer 20

The lender will consider the plans and specifications, breakdown of costs, the contract, the repayment plan and borrower’s financial information.

Question 21

The lender and builder will agree on a disbursement system for releasing money as the construction progresses according to a predetermined schedule

Answer 21

This type of payout arrangement is the major distinguishing characteristic of the construction loan over other real estate loans

Question 22

The construction lender can disburse the funds by one of these methods.

Answer 22

Draw system.
Percentage-of-progress system.
Voucher system.
Builder’s control service

Question 23

A “take-out” commitment

Answer 23

is a promise by the permanent lender that if certain conditions are met, the lender will issue a permanent loan to the borrower once the construction is completed in a satisfactory manner.

Question 24

A partial release clause

Answer 24

most commonly found with a blanket mortgage, which is placed on multiple parcels of property, such as is the case with a subdivision development. As the developer sells each individual lot, that lot is released from the blanket loan and then the loan balance is reduced a certain amount.

Question 25

A rental achievement clause

Answer 25

requires the developer-borrower to pre-lease a certain amount of space in the building. To meet this contingency, the developer will give the lender a certified rent roll that specifies who the tenants will be and which space they will be leasing, the length of each lease and the annual rent each of the tenants will be paying.

Question 26

Construction lenders are always cautious about the possibility of mechanic’s liens

Answer 26

which attach to the real property, plus the buildings and improvements that are situated on the land. Mechanic’s liens remain in effect until the workmen have been paid in full. Mechanic’s liens can arise if the builder does not complete the project or if the job is completed and the builder does not pay those suppliers or contractors who worked on the project.

Question 27

If an owner files a notice of completion within 10 days after a job is essentially completed

Answer 27

the original contractor has up to 60 days in which to file a lien. All other workers have only 30 days. If the notice of completion is not filed and recorded or, if the notice is flawed in any way, all parties have up to 90 days from the date of substantial completion in which to file a lien.

Question 28

If the builder started any of the construction work before the construction loan was actually recorded

Answer 28

then it’s possible for a mechanic’s lien to take priority over any other liens that were placed after the job started. This is called relation back doctrine.

Question 29

If a tenant negotiates a contract for repairs or improvement to a property without the owners’ approval,

Answer 29

the owners can protect themselves against a lien by filing and recording what’s called a Notice of Nonresponsibility in which they deny responsibility and liability for the repairs or improvements.