What You Need to Know about Construction Loans
Construction loans are designed to assure adequate funds to complete the construction of the building(s) and to produce a value that supports the amount of the loan. Funds are drawn down on residential loans based on a percentage of work completed draw schedule.
Lenders have designed their construction loan program to assure a smooth payment process during construction and to provide the borrower and the lender with a secure position.
Typical Construction Draw Procedures:
1. The following procedures are typical for draw disbursements.
A. A draw schedule will be provided to the builder/contractor at closing along with the construction loan agreement.
B. Draws may be taken on a "percentage of work completed" basis. Lenders will typically charge $50 to $75 per draw to cover the construction inspector's fee. These fees may be taken as lump sum at closing based on six draws or taken from the construction fund at each draw. The practice depends on the lender.
1. A construction loan fund is established with the loan proceeds.
2. When a builder has completed at least 15% of the work, the builder will request a draw from the lender.
Typically the lender will have a construction inspector visit the construction site within 24 hours to verify the percentage of work completed.
Many times the lenders will use the construction loan appraiser to perform the inspections. Typically the inspector will provide verbal confirmation of completed work and follow up with written confirmation and photographs.If an inspection must be rescheduled because of incomplete work, there will be an additional $50 to $75 inspection fee charged. The borrower should not pay this fee as it is the builder's responsibility not to order an inspection unless the work is done.
3. Disbursements are generally made by check or direct deposit to the builders account.
4. All disbursements but the last one are typically made payable to the builder unless otherwise specified. Most lenders make the final disbursement check payable to both the builder and the borrower. This allows the borrower some leverage over the builder to make sure the home is completed satisfactorily before releasing the funds by signing the check.
When the builder requests a draw, the lender typically has paperwork requirements in addition to the draw request.
On the first draw the following will typically be required:
A. Building Permit
B. Verification that Mortgage and Notice of Commencement has been recorded.
C. Original Slab Survey (2 copies) with certification to the lender.
(Survey may be faxed for first draw but originals must be provided by the second draw.)
D. Copy of Builders Risk Policy with endorsements showing coverage for the unit under construction and naming the lender.
E. Proof of soil treatment.
Each draw requires:
A. Affidavit of General Contractor
B. With each draw request, the builder is required to provide Partial Release of Lien from the sub-contractors for work paid at the prior draw. The lender will require a Partial Release of Lien at each draw for each sub contractor that submits a Notice to Owner". The lender usually reserves the right to requests release of liens from any subcontractor during any time during the course of construction.
The final draw requires:
A. Original Final Survey (3 certified copies)
B. Certificate of Occupancy
C. Contractor's and Mortgagor's Final Affidavit
D. Sub Contractor's Release of Liens