Construction Loans – Understanding Pulls

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    Although building your own home or tackling a large remodeling project can be difficult the more you understand about the process and the better you plan ahead will give you that margin to deal with the unknowns.

    You can think of it like planning a trip. You know where you are going to go and you know basically how much it will cost. You do some research on the best places to stay, eat and what things you might want to see. When you make reservations and buy your tickets you ask about refunds just in case your work cancels your time off. You compare prices of rental cars and you get a few numbers just in case they are out of the model you want. And if you are smart you find the locations of the closest hospitals, collect emergency telephone numbers and the location of the embassy if you are going out of the country.

    The more you plan, the more you already know without having to learn it on the fly the better you will be.

    Well since banks have been through more construction projects then you probably ever will be they know dealing with situations on a construction site can lead to cost overruns and wasteful spending.

    When you apply for a loan you will need detailed information about the project including pricing of the project and how you will pay back the loan.

    Instead of just handing you all of the money at once banks will  want you to schedule your payments to contractors and other entities based on a timeline of completion. This kind of makes a home construction loan more like a line of credit with needed approval. In many instances the bank will even send inspectors to your site during the project before they release that portion of your loan to pay off your contractors.

    For this reason you need to be very detailed with your contracts on how people will be paid. You will also want to have contingency plans to pay for work out of your own pocket for unknown costs. If you are working with a contractor that you need to fire they may require that you pay for all work to date immediately. If your bank will not release the money to pay the contractor and adjust your schedule to pay for the new contractor you hire then the original contractor will place a lien on your property and take you to court.

    For these reasons and many more you must write your contracts with wavers of liens and payment dates that favor you. If a contractor won’t or can’t work within your schedule then you will either need to adjust your loan pulls or find other methods to pay your contractors. Unlike a completed home that you purchase you are purchasing portions of work and materials that will eventually become your home or new addition.

    A typical Loan Pull Schedule will include some of the following, your project will be different.

    Survey, Excavation
    Foundation, Electric Service line drop
    Windows & Doors
    Plumbing waste and feed lines
    Gas Service line
    Plumbing and HVAC Rough in
    Electrical Rough in
    Finish Plumbing & Electrical
    Landscaping, Driveways

    There are a number of other smaller items you will need to deal with including delivery of appliances but one of the largest overlooked items is change orders.

    Change order fees are applied to contracts after the original quote. They include not only the cost of the new change but also a fee. You should work with your contractors to have those change order fees waved  and costs applied to final payments .

    You will also find that contractors may need materials payments up front. It is always best to withhold materials payments until they are delivered that way the materials become yours at time of payment however for special order items like handmade cabinets you will have to at least put a down payment on the item. If you have problems with the contractor requiring full material costs up front you can ask to make payment directly to the supplier.

    There are many different things you will have to deal with while your project is completed and working with your banker is a very important part. But no matter how big or small the contractor you hire is you must require a waiver of Lien before you give them final payment. This means they can’t come back later because they lost their records and attach your house or in some cases even force a sheriff’s sale.

    The more you plan the better your job will go.




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