Construction Mortgage - Draw Process

Construction Mortgage Draw Process
What exactly is the Draw Process?
It's a straightforward agreement between you, your builder and your lender that clarifies when and how payments will be made during construction.
With a Draw Process in place, you're all on the same page. Everyone knows what to expect, and you avoid big surprises and unscheduled delays due to cash-crunches.
You're also in control - as much as you want to be. You can manage payments yourself, or you can have funds sent directly to your builder as you sign off on each stage of construction.
What does all this mean for your project? Your builder has access to more fluid funding and doesn't have to rely on a separate line of credit - or rely on your cash-reserves. Payments will be made as work progresses. Flexible funding helps keep your project on track.
Here's how the Draw Process works.
Step 1: You and your builder draft a draw schedule. Prior to your loan's closing, you'll work with your builder to draft a draw schedule. Generally, funds are disbursed on a percentage-completed basis according to your agreement with your builder. We can advise you and provide the appropriate paperwork. We can also tell you about standard practices and typical expectations.
We've designed our loans to provide extra flexibility, so you have more choices. You can pre-assign payments by specific dates. Or you can be more flexible and make payments contingent on the progress of the work.
We can also provide an initial disbursement before construction even begins. It's a smart way to cover start-up costs like architectural and engineering fees, as well as permits and other soft expenditures. With most Custom Construction financing, the foundation must be poured before any funds are released. But we can deliver your first draw as soon as your loan closes, provided it is used to cover soft costs as indicated above.
Step 2: Your loan closes. Construction begins.
From the beginning, you can count on working with a senior loan disbursement administrator, a specialist responsible for tracking the details of your financing and the progress of your construction.
During the construction phase, your loan payments begin. To help you meet any financial challenges, you can make interest-only payments while your house is being built. We'll calculate the interest based on the total amount disbursed, so your payments will increase only as more of your loan is disbursed. If you choose our interest reserve program, you have the option of making no out-of-pocket payments during construction until the interest reserve is exhausted. With the interest reserve program, the interest will be financed and thus included in your total loan amount.
How much cash do you need? Maybe not as much as you think. Most construction lenders advise having a sizable cash-flow available. With our fully financed reserve funds, you don't need to have a lot of cash on hand to keep your project on track. Because a generous percentage is set aside for emergencies, and the reserve is fully financed, the unforeseen expenses won't drain your immediate resources.
Step 3: You manage draws as work progresses.
Your builder will request payments by submitting a Draw Request and Disbursement Authorization Form. Whether you've agreed to an established payment schedule or you're using a more flexible process, a draw request is required. Each request must be signed by the appropriate parties and faxed to us. Additionally, a lien waiver from your builder is required. Your senior loan disbursement administrator will oversee each request and payment.
Once we receive a draw request, we'll order an inspection of progress. For the first draw after the foundation is completed, a foundation endorsement is also required from your title company.
In those rare cases, in which you would like a deposit to be paid for custom materials, please also include the supplier's invoice.
If you builder is the sole signatory, we will wire funds free of charge to you or your builder's account once the results of each inspection are reviewed. On the day of of each disbursement, an updated Draw Request and Disbursement Authorization Form showing the remaining available funds will be mailed to you and faxed to your builder, unless otherwise requested. Typically, the process is completed in three to five business days.
Step 4: In the event of unexpected expenses, tap into reserve funds.
Unforeseen expenses are common in home construction. Contingency reserve funds can keep your project moving forward by covering unexpected expenses and cost overruns. Although it is typical for a lender to require cash reserves for these purposes, we can finance those funds for you.
The amount of contingency reserve funds is usually equal to five to ten percent of estimated hard costs, which include labor and the building materials associated with the project, such as lumber, cabinets, flooring, etc.
Step 5: Construction is completed. A final draw is requested.
To secure the final payment and close your construction loan, several documents are required. You will need to provide the following:
Borrower Letter of Satisfactory Completion stating that construction is completed to your satisfaction, and requesting that all remaining funds be released.
Copy of Permanent Homeowner's Policy showing correct mortgagee clause.
Draw Request with the amount to be released for the final draw.
Payment Authorization (if you are requesting that your mortgage payment be automatically taken from your bank account).
The Builder will need to provide the following:
Contractor Affidavit stating that construction is complete and that all material, labor and subcontractors have been paid in full.
Final Lien Waiver and Release.
Copy of the Notice of Completion (if if required by your state or municipality).
The Lender will be responsible for ordering the following:
Final Title Update and ALTA Rewrite.
Final 442 Appraiser's Inspection to re-inspect the property to confirm the completion of construction in accordance with what was approved. Please note that if the builder has already provided you with the keys to the residence, the appraiser will be contacting you for access to your new home.
Step 6: Your loan automatically rolls over.
The transition from construction to permanent financing is seamless. No separate approval process is required, so no extra fees are incurred.
After the final draw is released, your loan - based on the total funds actually disbursed, including any reserve funds - will roll over to its permanent phase. We will send you a letter advising you of your principle balance and your new payment. An automatic payment service can be arranged to make your monthly payments even more convenient.