FinanceIntermediateAlabama Exam

A construction loan in real estate is typically:

AA long-term permanent loan with a 30-year term, though the exact requirements can vary somewhat by jurisdiction

BA short-term loan that finances the construction of a building, converted to permanent financing at completionCorrect

CFunded entirely by the FHA

DAvailable only for commercial projects

Why A short-term loan that finances the construction of a building, converted to permanent financing at completion Is Correct

Answer B: A short-term loan that finances the construction of a building, converted to permanent financing at completion

A construction loan is a short-term loan that funds building construction. When construction is complete, it is typically converted to a permanent (takeout) mortgage.

Exam Tip: Finance

Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.

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Key Terms to Know

Loan-to-Value Ratio (LTV)

The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

Amortization

The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

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