Which statement is true about a construction mortgage?

Which statement is true about a construction mortgage?

• A. It may be a first mortgage, a junior mortgage, or a junior wrap-around mortgage.
• B. The funds are often used for home renovations or to fund a college education.
• C. The lender is loaning on land, air, and a promise to build.
• D. This would likely be used in the case of a furnished condominium.

Answer: (C)

Construction financing is a loan used to fund building a new home or additions, and it is secured by the property being developed. The lender’s security is described as loaning on land, air, and a promise to build—the land itself plus the planned improvements and the borrower’s agreement to complete them. Because construction projects have changing value as work progresses, funds are released in draws aligned with stages of completion, and the loan is typically short-term with potential conversion to permanent financing once construction is finished. This is what makes the statement true: the lender bases the loan on the land and the future structure, not on a completed home yet. The other ideas describe different kinds of financing: using funds for renovations or education refers to renovation or personal loans, not construction loans; a scenario about a furnished condominium relates to financing a completed, furnished unit rather than building it; and the notion of different lien positions like a wrap-around mortgage isn’t the standard description of how a construction loan works.

Construction financing is a loan used to fund building a new home or additions, and it is secured by the property being developed. The lender’s security is described as loaning on land, air, and a promise to build—the land itself plus the planned improvements and the borrower’s agreement to complete them. Because construction projects have changing value as work progresses, funds are released in draws aligned with stages of completion, and the loan is typically short-term with potential conversion to permanent financing once construction is finished. This is what makes the statement true: the lender bases the loan on the land and the future structure, not on a completed home yet.

The other ideas describe different kinds of financing: using funds for renovations or education refers to renovation or personal loans, not construction loans; a scenario about a furnished condominium relates to financing a completed, furnished unit rather than building it; and the notion of different lien positions like a wrap-around mortgage isn’t the standard description of how a construction loan works.