HOW DOES A BUILDER GET PAID with A CONSTRUCTION TO PERMANENT LOAN

When you close on a Construction to Permanent Loan your down payment along the Lender’s funds are used to pay the seller of the lot, or payoff any liens you may have on the lot at time of settlement. Additional funds maybe disbursed to your builder to satisfy any upfront deposit requirements established in your construction contract.

Photo provided by Bay to Beach Builders

The balance of the funds are then placed into an escrow account with the bank, to be paid out to the builder at various milestones of completion.

The Lender is typically required to hold all of the funds necessary to complete your new home in this escrow account. This would include any down payment funds provided by the homeowner which are in excess of those required to satisfy the purchase or payoff of the lot and any contractually required builder deposits.

The payments are distributed to the builder as your new home is being constructed based on a Construction Draw Schedule. This payment schedule can vary, but most Lenders will review the payment vs. milestones of completion to validate the payments are not front loaded. They review and try to insure payments are evenly disbursed across the entire construction period of the loan.

These payment schedules can come in different formats based the nature of the project. In some cases, there are existing structures to be removed prior to construction beginning, features to be added after your homes completion, like a pool or outdoor entertaining area, etc.. The schedule can be in various formats based on the project and scope of work. The are typically agreed upon in advance by all parties, Builder, Homeowner and the Lender.

When a builder has reached a milestone of completion, they contact the Bank to get paid. The client is typically notified and the Lender requests an independent inspector go out to the job site to confirm the work has been completed. The inspector reviews the progress and compares it to the house plans and specifications, prepares a report and sends it back to the Lender. Clients are usually provided a copy of each inspection report and assuming the milestone of completion has been met, the funds are disbursed from the escrow account to the builder. The draw schedule to the left is one of the better options available.

As the funds are released from escrow, the balance of the loan increases. As the loan balance increases, the monthly interest payments due during construction will as well. With most Construction to Permanent Loans, the monthly payments are based on the average outstanding balance of the loan. This is an important question to ask as some lenders charge interest on the whole loan, vs actual money disbursed which is the preferred option. You should try to avoid those lenders for obvious reasons.

This process continues until the home is 100% completed. When it is, the lender will require a final inspection along with a Certificate of Occupancy / Completion Certificate by the State, County or Local Building Authority. In most cases, Lenders retain 10% of the construction costs to be disbursed as the final draw payment to insure the work is completed. Many will require the homeowner to provide a certification or authorization prior to releasing the final payment to make sure their client is 100% happy with their amazing new home.