Construction Loan Draw Process
Construction Loan Disbursements
It is always a good idea to get a construction loan from a construction loan lender that will disburse the funds to the builder rather than you as the borrower. This assigns the responsibility for the disbursement of funds to the lender and assures professional inspections as the construction progresses. Construction loan lenders have strong requirements for the disbursement of funds that will protect you as the homeowner. The lender assumes fiduciary responsibility for correct administration of the construction fund.
Benefits of a Construction Loan
A construction loan should be used even if you ultimately will pay cash for the house. You do not want to get into the business of personally making periodic payments to your builder. It will only end in litigation and be costly to you. At completion of construction and final disbursement from the lender, you can pay off the construction loan.
Construction Loan Fund
At the construction loan closing, a construction loan fund will be set up by the lender. In this example 10% of the construction loan fund was disbursed to the builder using the sample construction draw schedule below. This disbursement at closing is paid to cover builder expenses for permitting, architects and other up front costs. Make sure you agree to this amount. If you have given the builder a large down payment, there should not be a disbursement to the builder until the first draw.
Control Builder Disbursements
Don't let the builder get too much money up front! You could end up with too little money in the construction loan at the end. That is why you should religiously adhere to the construction draw schedule. The biggest risk in a construction loan is that there is not enough money in the construction fund to complete the construction of the house. Builders want as much money as they can get up front and may not spend all of it on your house.