Developer vs. Contractor
An important clarification must be made between two seemingly similar situations that require two differing loan programs. A construction loan is required when the borrower’s funds are needed for the actual building of the property.
Large-scale developers usually do NOT require the buyer to obtain “construction” financing. Instead, most developers will require that the borrower be approved for a “purchase” mortgage loan. The actual construction of the property is funded with the developer’s own cash or assets.
The buyer’s mortgage loan commitment is simply a guarantee to the developer that the buyer is qualified and will be able to purchase the newly constructed property immediately after construction is completed.
The home shopper will need a construction loan to build a custom home on a specifically chosen lot. The home shopper will also need a general contractor for such construction. The construction loan is used to actually build the home—not to purchase a newly built home.