When a builder purchases a lot with a low down payment and intends to obtain a construction loan, what type of clause is most likely associated with the loan for the lot?

In the context of a builder purchasing a lot with a low down payment and seeking a construction loan, the most relevant clause is the subordination clause. This clause establishes the priority of claims or liens against the property. In many cases, when a builder is acquiring a lot and plans to construct on it, there might be existing loans or liens on the property. The subordination clause allows the construction loan to take precedence over other existing debts.

This is crucial for lenders because they want to ensure that their loan for construction is the first claim against the property, thereby minimizing their risk. A subordination clause allows the construction loan to be positioned ahead of other loans, such as a purchase money mortgage, in the event that financial difficulties arise. This ensures that the lender can recover funds in the event of a foreclosure or sale.

Understanding this clause is vital in real estate transactions, particularly involving developers or builders with complexities in financing arrangements.