by: Rick Gomez
13. How does your builder get paid while your home is being built?
There are two methods that banks use to make sure your builder gets paid while building your home.
The Voucher Reimbursement system has been around for quite a while. As usual you'll have some builders that are very familiar with this method of payment and do not like change.
Most builders are really only concerned with how fast they can be paid and how often they can be paid.
Most banks find that the voucher system is simply too much paperwork to deal with anymore. The builder is given a big book of vouchers that looks like a check book and when they want to get paid or need to pay a contractor they need to fill out a voucher form. This voucher form is a request for payment and as long as the contractor has signed the lien release the bank will pay the amount requested.
The bank will also request an inspection throughout the construction loan to make sure that the work is completed.
The Draw Reimbursement system is becoming the standard for construction loan funding for most banks.
The main difference is that the bank puts the accounting responsibility on you or your contractor. The bank uses your cost breakdown as the guide for the draws. Some banks use specific schedules of 4 to 7 draws based on completed construction milestones, such as foundation or framing.
The draw systems also allow the choice of taking draws on a monthly basis, collecting partial payment for work and material items that have been completed.
I personally prefer the draw reimbursement system because:
1. It requires less work.
2. Provides more control for both the customer and the builder.
3. The funds are wired directly into your bank account.
3. It's easier to use than the voucher system.
4. Some banks now have online draw requests.
14. What type of construction loan insurance is required and who is required to get it?
The reality of construction loan insurance. There are three types of insurance needed to build. All banks require the first two insurances, course of construction and general liability. Workman's compensation is only required if your builder has employees.
1. Course of Construction Insurance. This policy is an all risk policy to include, fire, extended coverage, builder's risk, replacement cost, vandalism and malicious mischief insurance coverage.
2. General Liability Insurance. You or your builder can provide this policy. This policy is a comprehensive general policy or a broad form liability endorsement. The minimum amount of $300,000 for each occurrence is required. If the builder provides the insurance a general policy of $1,000,000 or a broad form liability endorsement is required.
3. Workman's Compensation Insurance. If your builder owns his own company and has employees that are helping to build your home, workman's compensation is required.
If the builder simply subcontracts out the work and does not have employees per se, they will need to write a letter acknowledging that they do not have employees and are not required to have WCI.
15. Has your loan officer structured your construction loan properly and why it's so important?
I get loans all the time from customers that went to another lender or broker and were either turned down or were offered a below average construction loan.
The reason was because the loan was not structured properly before it was sent into the bank. Structuring a loan properly is simply making sure that you match the customer’s loan request to the banks underwriting guidelines.
Recently I received a construction loan request from a customer that was turned down by a large national bank. The loan officer had calculated the income incorrectly and submitted the loan as full documentation.
The customer owned his own business and had a lot of tax deductions on his tax returns. The way banks qualify customers as full documentation is very conservative and the loan was turned down.
We took the loan, found the problems upfront and submitted the loan as stated income.
The customer was approved and built a beautiful home in Rancho Santa Fe CA.
Structuring construction loans for approval is vitally important and is the last thing on most customers’ minds. Each and every time I receive a loan from a customer with a bad loan experience it is always because the loan officer did not specialize in construction loans and did not structure the loan accordingly.
Other common mis-structured loan scenarios include:
1. Low cash equity.
2. Improperly completed appraisal.
3. Unexplained credit derogatory.
4. Income incorrectly calculated.
5. Mismatch of customer loan request to the correct lender.
6. Plain and simple incompetence
The old saying “you get what you pay for” is especially true when obtaining financing in building your new home.
About the author:
Rick Gomez specializes in construction loans in the state of California. You can download a complete construction loan application package and a list of the best banks at http://www.californiaconstructionloans.com
13. How does your builder get paid while your home is being built?
There are two methods that banks use to make sure your builder gets paid while building your home.
The Voucher Reimbursement system has been around for quite a while. As usual you'll have some builders that are very familiar with this method of payment and do not like change.
Most builders are really only concerned with how fast they can be paid and how often they can be paid.
Most banks find that the voucher system is simply too much paperwork to deal with anymore. The builder is given a big book of vouchers that looks like a check book and when they want to get paid or need to pay a contractor they need to fill out a voucher form. This voucher form is a request for payment and as long as the contractor has signed the lien release the bank will pay the amount requested.
The bank will also request an inspection throughout the construction loan to make sure that the work is completed.
The Draw Reimbursement system is becoming the standard for construction loan funding for most banks.
The main difference is that the bank puts the accounting responsibility on you or your contractor. The bank uses your cost breakdown as the guide for the draws. Some banks use specific schedules of 4 to 7 draws based on completed construction milestones, such as foundation or framing.
The draw systems also allow the choice of taking draws on a monthly basis, collecting partial payment for work and material items that have been completed.
I personally prefer the draw reimbursement system because:
1. It requires less work.
2. Provides more control for both the customer and the builder.
3. The funds are wired directly into your bank account.
3. It's easier to use than the voucher system.
4. Some banks now have online draw requests.
14. What type of construction loan insurance is required and who is required to get it?
The reality of construction loan insurance. There are three types of insurance needed to build. All banks require the first two insurances, course of construction and general liability. Workman's compensation is only required if your builder has employees.
1. Course of Construction Insurance. This policy is an all risk policy to include, fire, extended coverage, builder's risk, replacement cost, vandalism and malicious mischief insurance coverage.
2. General Liability Insurance. You or your builder can provide this policy. This policy is a comprehensive general policy or a broad form liability endorsement. The minimum amount of $300,000 for each occurrence is required. If the builder provides the insurance a general policy of $1,000,000 or a broad form liability endorsement is required.
3. Workman's Compensation Insurance. If your builder owns his own company and has employees that are helping to build your home, workman's compensation is required.
If the builder simply subcontracts out the work and does not have employees per se, they will need to write a letter acknowledging that they do not have employees and are not required to have WCI.
15. Has your loan officer structured your construction loan properly and why it's so important?
I get loans all the time from customers that went to another lender or broker and were either turned down or were offered a below average construction loan.
The reason was because the loan was not structured properly before it was sent into the bank. Structuring a loan properly is simply making sure that you match the customer’s loan request to the banks underwriting guidelines.
Recently I received a construction loan request from a customer that was turned down by a large national bank. The loan officer had calculated the income incorrectly and submitted the loan as full documentation.
The customer owned his own business and had a lot of tax deductions on his tax returns. The way banks qualify customers as full documentation is very conservative and the loan was turned down.
We took the loan, found the problems upfront and submitted the loan as stated income.
The customer was approved and built a beautiful home in Rancho Santa Fe CA.
Structuring construction loans for approval is vitally important and is the last thing on most customers’ minds. Each and every time I receive a loan from a customer with a bad loan experience it is always because the loan officer did not specialize in construction loans and did not structure the loan accordingly.
Other common mis-structured loan scenarios include:
1. Low cash equity.
2. Improperly completed appraisal.
3. Unexplained credit derogatory.
4. Income incorrectly calculated.
5. Mismatch of customer loan request to the correct lender.
6. Plain and simple incompetence
The old saying “you get what you pay for” is especially true when obtaining financing in building your new home.
About the author:
Rick Gomez specializes in construction loans in the state of California. You can download a complete construction loan application package and a list of the best banks at http://www.californiaconstructionloans.com
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