In most of the projects we deal with, a bank will be involved in providing money to build the project, and ultimately move into a more permanent home mortgage. Most people think that when they close on a construction loan, they have their project totally covered and paid for. Unfortunately, the bank is only there to reimburse for cost of items that are 100% complete meaning they are installed and in place. Due to timing of deliveries, any specific deposit requirements due to order material, or based on when an installer can put the component in place, the amount due to the contractor will most likely be different than the draw schedule put forth by the bank. So, it’s important to understand how bank construction lending operates when embarking on your custom construction project to prevent delays or conflict in getting your project complete.
The bank is there to reimburse you and you only for the costs. The contractor has no say in what the bank will release as far as funds because the bank only releases what is complete. The concept is you as the Owner need to accept and understand is that you are the developer when building your project. You hire a subject matter expert to help you along, but they are not there to finance any portion of your project. You become responsible for the costs of everything a developer would bear the costs of to make your project become a reality. It will be your responsibility to pay for the Architect, surveyor, structural engineer, civil engineering, financing, utilities, permit cost, and anything that would pertain to starting the build process. The contractor is only there to help you build the product which is the last step.
Being a developer ourselves and as part of our service to our clients, we help them navigate through the process of finding an architect, surveyor, engineers, and everything to help them get to their permit. All those invoices will be paid directly by our clients along the way. Once construction starts, the cost of the build is paid for by the owner. The builder will typically submit invoices or draws directly to you for you to pay. Since the builder is not part of the loan process nor the developer in this case, there is no direct correlation between the bank disbursement and the builder’s costs and invoices for a given period. If the bank does not release enough funds out of your construction loan to cover the builder’s invoice, the balance due will be on you to pay. You will need to have enough liquidity to pay for the lag in the invoice the bank does not pay. Having a liquid amount of cash above your loan amount will be a must when setting out to build your custom home with bank construction financing.