Q: I want to buy a new house but don't understand the process. Do I just buy the finished house from the builder or does he expect me to buy a lot, get a loan and pay him along the way while he builds it? What usually happens?

A: It depends on the builder and the price range of the house you are wanting to purchase. Builders of "starter homes" recognize that many of their prospective customers are not financially able to qualify for a construction loan nor might they understand all the intricacies of short-term vs. permanent financing. So the typical builder of entry-level homes obtains his own construction financing or simply builds his houses "out of pocket," meaning that he pays cash for the lot and pays whatever the costs of construction are.

Then, when you purchase his finished product, he reimburses himself for all the expense he has incurred. If a loan was used along the way, it is paid off when you buy.

Other builders, especially those being asked to build homes with custom plans or nontraditional designs, are happy to build the house but prefer to leave the financing to the purchaser.

In this situation, the lot can be brought to the transaction by any party but is often already the property of the builder or the buyer.

Usually, the construction lender is a local bank, one that specializes in home construction loans. As the house is built, the builder requests draws based on the level of the home's completion. When the house is finished, and the buyer accepts the final product, the bank pays the last draw to the builder and the construction loan is fully funded.

Because construction loans are typically set at a higher rate than conventional home loans, the owner wants to pay off the construction loan as quickly as possible. About 30 days before the house is finished, the buyer applies for conventional mortgage loan approval subject to the house being completed according to plans.

This way, the construction loan is paid off and the permanent financing is put in place as quickly as possible after the house is built.

Some lenders offer a package deal to the consumer, with a "combination c and p" loan and only one set of closing costs. This means the buyer can qualify simultaneously for both the construction and the permanent financing and theoretically save some costs by avoiding two separate sets of closing costs.

This is why it really does pay to shop and compare when thinking about building a home, especially one from the ground up.

Q: I am building a home with a builder I trust. I really don't see any need for an additional home inspector, especially since county inspectors are responsible for electrical, plumbing and heating and air. Not only that, the house comes with a complete one-year warranty. What do you think?

A: I think you should have a home inspector perform a phased inspection during construction.

First, although you trust your builder completely, know that he is not there every minute of every day and uses subcontractors to complete parts of the construction. Trust is not the issue.

Second, the county inspectors are far too busy to spend more than a few minutes at each site, looking for just the minimum standards in force in that county. While these inspectors may do a fine job, you want a more thorough and detailed examination at multiple stages of progress.

Finally, the warranty only comes into play if problems develop and then only if they appear during the first year.

Q: A couple of weeks ago, you explained about mortgage interest, but I still don't understand why my settlement statement shows "per diem" interest. If home mortgage loans are calculated on a monthly basis, why was I charged a daily fee?

A: As a convenience to you, almost all conventional home loans have payments fall due on the first of every month. However, most buyers choose not to have their sale occur exactly on the first of any given month. So the lender needs some way to charge you a prorated amount for the use of the money between the day of closing and the end of your first month of ownership.

As a result, your closing attorney charged you a "daily rate" of interest, sometimes called a "per diem" interest charge, based on the number of days between the day of closing and the end of that month. Typically, lenders will multiply the loan amount by the interest rate, then divide by 365 to determine the daily interest charge. The day of closing is typically the first day charged.

 John Adams is a broker and investor. He hosts the "John Adams Radio Show," a call-in program dealing with homeownership and real estate, from 1 to 3 p.m. Saturdays on NewsRadio 640 (WGST). For more real estate information or to make a comment, visit www.money99.com.