What type of financing involves a lender releasing funds to a developer as each home is built?

The correct answer is construction financing. This type of financing is specifically designed for the building of homes or commercial properties, releasing funds to the developer incrementally as construction progresses. This aligns with the need for capital as each part of the project reaches certain milestones, enabling developers to manage cash flow effectively and ensure that they have the necessary funds at each phase of the construction process.

This type of financing reduces risk for both the lender and the developer, as the lender can assess the progress of the construction and ensure that funds are only provided for completed work. It is structured to address the unique financial requirements of construction projects, which typically do not fit traditional mortgage models that fund the entire loan amount upfront.

In contrast, the other options relate to different financing structures. Obligatory financing does not accurately describe how construction funds are released as it isn’t a standard term in real estate financing. Equity financing pertains to funding through the sale of shares or ownership interests and does not involve a lender releasing funds. Fixed-rate financing refers to loans with an interest rate that remains constant over the life of the loan, which is not specific to the construction process.