Build your own home with a Construction Loan!
Frequently Asked Questions
Q. What is the general loan approval process for a Construction Loan?
A. The 4 major steps in the construction loan approval process are as follows:
Builder Review: EHL is required to review and approve the builder you have chosen. Important Note: You should not rely on EHL’s builder approval process to replace your own due diligence in vetting the builder’s qualifications.
Project Review: EHL is required to review and approve the construction project and documentation; including house and site plans, fixed-price building contract, cost breakdown and description of materials. We do this to make sure all costs to build the home have been properly considered and to evaluate the collateral for the loan request.
Credit Review: EHL is required to review and approve documentation used to verify and support your ability to repay the loan (verification of credit, income, assets, etc.) and your ability to pay for potential cost overruns during the construction period (verification of cash reserves available after closing).
Appraisal and Final Review: After all of the project documentation has been reviewed and approved, the appraisal can be ordered. The appraiser will review the plans and specifications, description of materials, etc. and locate comparable properties to appraise the value of your new home. The more unique your home and/or property is, the more difficult it can be to find recently sold comparable properties and to determine value. The appraisal has to be reviewed and approved by EHL.
Q. What can delay a construction loan from being approved and/or closed?
A. As much as everyone involved does to prevent any delays (builder, borrower, lender, seller, government officials, etc.) inevitably delays will occur on a construction project. A variety of things can cause a delay, some of which are beyond your control. Examples of common causes for potential delays are:
Construction documentation provided is not correct or is incomplete (on project and/or builder).
Construction Contract is not acceptable. (EHL requires a “Fixed-Price” Contract.)
Appraised value ends up lower than expected.
Satisfactory verification of funds to close not received.
City or County has a new “last minute” requirement.
Building permit has not been issued.
Expired loan documentation needs updated (because of the delays).
Q. I’m anxious to start construction now. Why is it so important that I not start any work until the loan has closed, recorded and funded?
A. The Lender’s loan is required to be in “first lien position” on title to the property; meaning no other liens can show in front of it. If ANY work has started before the loan has recorded, even clearing and excavation, the Lender’s first lien status is no longer secure. This could prevent your loan from closing. This is a risky position for you, since most Lenders’ cannot lend on a property in “mid-construction” for the same reason. If you have started any actual work, please inform your EHL Loan Officer immediately to examine options.
Q. What are prepaids?
A. Relative to a construction loan, prepaids are construction costs that you’ve paid for in advance of closing the loan. Typically, there are preliminary costs included in the Construction Contract that are required to be paid and completed prior to starting any actual work; such as plans, permits, surveys and design. A borrower will usually want credit for these prepaid items in order to reduce the amount of funds required to close the loan. For example, if total funds required to close loan is $35,000 and you paid for the building plans and the building permit in advance totaling $15,000. EHL can potentially credit you $15,000 for prepaids and reduce the amount of funds required to close to $20,000.
Q. How do I receive a credit for items I’ve paid for in advance?
A. We call these “Prepaids”. To receive a credit for prepaid items at closing, the following requirements must be fulfilled:
All
requests and documentation for credit must be provided to EHL for review and
approval prior to the preparation of loan documents.
Builder and Borrower must complete and sign EHL Form titled “Prepaids Worksheet” to acknowledge and agree on the items paid for and total credit amount.
The item must appear as a budgeted line-item on the builder’s Cost Breakdown.
The item paid must be for completed work related to the construction project. (See Q&A above regarding the importance of NOT starting any actual work on the property.)
The cost of the item and proof of payment must be documented. (Typically a copy of the invoice(s) and canceled check(s) are simplest form of acceptable documentation.)
The credit amount cannot exceed the amount for the specific budgeted line-item.
Q. Can I receive a credit for any “stockpiled” materials?
A. No. A credit will not be provided for materials received, but not yet installed. The credit will be provided after installation.
Q. Can I receive a credit for any upfront deposits required, such as for custom kitchen cabinets or special ordered counter tops?
A. No. A credit will not be provided for upfront deposits required. Materials must be installed to receive credit. This is true at any point during the construction period.
Q. What about for a manufactured or modular home? If the manufacturer requires a large deposit prior to assembly and delivery, will EHL allow a disbursement at closing for this purpose?
A. A credit is not typically given in this situation until the package arrives on site. Case-by-case, depending on the amount of equity you have in the lot and the amount of the deposit required, EHL may be able to make an exception and provide some or all of the deposit at closing.
Q. How does the credit amount for prepaids affect my loan and construction funds?
A. After closing the construction loan, the first request to draw funds from your construction account (aka “Draw Request”) will be DECREASED by the total credit amount approved for prepaids. Important Note: If the credit amount for prepaids EXCEEDS your total funds required to close, you will not have to bring any money in to close and the excess credit amount will typically be held back for contingencies.
Q. What is a draw?
A. A “Draw” is a disbursement of funds from the construction
account. When you get a Construction Loan, the funds to construct your home are
not disbursed to the builder all at once. Funds are disbursed as work is
completed over a period of months. Draws are based on the
work completed on the day the property is inspected and disbursed accordingly to your builder upon your approval. Your builder is required to use all draw funds to pay the subcontractors and material suppliers for all work completed on your home per the Construction Contract.
Q. How is interest calculated on the loan during the construction period?
A. Interest is calculated on the total dollar amount disbursed from the loan amount to date. Interest owing begins to accrue on the date of the first disbursement of loan proceeds. If you brought cash in to close the construction loan, your money will be used first before advancing any of the loan proceeds. As your home is being constructed, and money is disbursed from the construction account to pay for the work, the interest due EHL will increase each month as the total amount disbursed increases.
Q. How do I request a draw?
A. Most often the builder will contact you when they are ready for a draw. Draw requests are typically made at the beginning of the month so the Builder can pay sub-contractors and suppliers by end of the month. Shortly after your loan has closed with EHL (if not already provided to you at closing) you will be given a “Welcome Letter” which will include EHL contact information and instructions for draws, etc. Also included will be a form titled “Request for Advance”, which will be the form you complete, sign, and submit to start the draw request process. The first month following the closing of your loan, work together with your builder to request a draw amount based on the amount of work completed/installed to date. Both you and your builder are required to sign and date the Draw Request to indicate agreement and return to EHL for processing.
Q. How much does EHL charge for draws?
A. The construction loan allows 1 draw per month for the length of your construction term (9 or 12 months). The fee for additional draws is $150 per draw.
Q. What is the general draw process with EHL?
A. After EHL Construction Department receives the completed Draw Request, we will review the account to see when the last request was made and what work has been completed since the last request, etc. Assuming everything is in order, EHL will request a property inspection from our chosen third-party inspection service. The inspector will provide EHL with a detailed inspection report along with pictures of the work in progress. EHL will compare the inspection report to your Draw Request. If there are discrepancies, EHL will inform you. The draw amount approved by EHL will be wired directly to your builder (unless otherwise instructed by you). A Job Progress Report will be sent to you and the Builder to sign and a new Draw Request form will be provided
with updated figures for you to use for your next draw request. The Job Progress Report is required to be acknowledged by both you and your builder prior to the next disbursement. The turnaround time from receipt of the draw request to wiring the disbursement is approximately 7 days. We expect a draw to be requested every month. To make certain work is progressing properly; we will conduct a monthly property inspection whether or not a draw has been requested.
Q. Why would the approved draw disbursement be less than the amount I requested?
A. The most common reason is that funds are requested for work that has not been completed. Draws can only be approved for actual work completed. No draws will be approved for items stored on site or not attached as a permanent part of the real estate. Another reason might be that the request made was for more than the budgeted amount of one or more of the line- items. Also, a request towards the end of construction may exceed the 10% holdback EHL requires until the home is fully complete (as evidenced by the appraiser completing their final inspection and final occupancy certificate or equivalent has been received, etc.)
Q. Can I request a draw more than once per month?
A. EHL’s construction loan program includes one draw per month during your construction term. Draws taken outside of this time frame are considered as an exception and are provided at EHLs discretion. If approved, as additional $150 fee per draw would apply.
Q. How do I get money to pay for materials that I need to buy before they are installed?
A. Draws will not be approved for advance purchases. The builder will generally cover most of the cost of materials since they have business relationships with suppliers that typically allow them up to 30 days to pay. If special materials are required from outside the builder’s supplier relationships, some of the cost may be required to be paid upfront (and then reimbursed after installation). You and your builder will need to come to an agreement as to how to resolve. Important Note: If you decide to charge items on your personal credit card to pay for deposits (or any other costs), it could negatively affect loan approval and/or terms of permanent financing especially if these amounts are not paid off. Be very careful before making the choice to increase your monthly debt obligations.
Q. Do I have to submit invoices and/or receipts for each Draw Request?
A. Your builder may be requested to do this.
Q. What if I spend more than the budget amount on the Cost Breakdown because I decided to increase the quality of the materials?
A. This is called an “upgrade”. You are responsible to pay for ALL upgrades out of your own
“pocket”. Draws will not be approved to pay for any upgrades. The amount available for draws from your construction account is based on the originally submitted Construction Contract, Cost Breakdown and Description of Materials, plans, etc. If you make any changes in plans or materials etc., you are responsible to pay for any increase in costs. Your contract with your builder will typically make this point clear as well. Important note: EHL will not approve any changes that result in a lower quality or value than what was originally appraised per plans and specifications (since the completed home is the collateral for the loan provided). If you decide to charge items on your personal credit card, or use any other assets used for qualifying to pay for deposits (or any other costs), it could negatively affect loan approval and/or terms of permanent financing especially if these amounts are not paid off. Be very careful before making the choice to increase your monthly debt obligations.
Q. What are allowances?
A. An allowance item is a budget item that has not been provided a “fixed-price” by the builder; meaning the cost could go up or down from the amount on the Cost Breakdown. EHL requires the majority of the costs to be fixed. This is required in order to be as certain as possible there’s enough money provided in the construction account to get the house built per plans and specs. However, there are always a few “Allowance Items”; items that perhaps the client (you) have not made a final decision on, such as cabinets or counter-tops, or doors. Or it could be for items that are difficult to provide a fixed-price on, such as a retaining wall, for example. Typically, the contract with your builder will clearly outline what the Allowance Items are. If not, ask them to make it clear and to clarify whether or not the cost of the allowance item was estimated high or low. Important Note: If the end cost of the allowance item is higher than the budgeted line-item amount, you are responsible to pay the difference out of pocket.
Q. What is a contingency?
A. A contingency is an amount set aside to pay for unforeseen costs during the construction period (aka “cost overruns”). Not every builder’s construction contract includes an amount for contingencies. You can always request a contingency amount be included; which we highly recommend. Some lenders automatically require a contingency be included as a requirement of the loan. EHL requires a 5-10% contingency for all construction loans. Typically, 5% for new construction and 10% for renovations, remodels and additions. The contingency may vary depending of the complexity of the project.
Q. How is the contingency disbursed by EHL?
A. Contingency funds are disbursed upon request on an “as needed” and “case-by-case” basis. EHL will not approve any disbursement from the contingency amount for voluntary changes to
plans or upgrades to materials, which are always the borrower’s responsibility to pay for out-of- pocket.
Q. If there are any contingency funds remaining in the account after the project is completed, what happens to the money?
A. It depends. If EHL required a specific contingency amount be included in the loan in addition to the builder’s total contract price, any amount remaining will typically be applied as a principal payment to your loan balance prior to conversion or refinance. (Your loan approval letter from EHL will stipulate.) If EHL did not require the contingency, but you elected to have a contingency included in your total contract price with the builder, the remaining contingency funds will be disbursed with the final draw either directly to you or to the builder or both; whatever has been agreed.
Q. How much will my payments be during the construction period and when do I pay?
A. EHL will send you a billing statement on a monthly basis. The amount owing will reflect interest-only which has been calculated on the total amount of loan proceeds drawn to date. As more funds are drawn from the loan amount each month, the amount billed will increase accordingly. Payments are due on the 1st of the month, with a 15-day grace period. Payments received after the grace period will be assessed a late charge. All payments owing to EHL must be current prior to receiving any further disbursements from the construction account.
Q. Why is the “Completion Date” about one month prior to the end of the “Construction Period”?
A. Your home is required to be completed and ready for occupancy by the “Completion Date” provided in your Construction Loan Agreement. After the home has been completed, EHL will need time to obtain the final property inspections and other final paperwork required from various parties prior to the final disbursement and conversion of the loan to permanent status (or in the case of a Two-Step program, prior to refinance). The “Completion Date” is approximately 30-45 days prior to the end of the “Construction Period” in order to provide enough time to complete these various tasks.
Q. Is there anything special I need to provide to get my final draw?
A. Yes. The following items are required prior to approving the final (10%) Draw Request:
Appraiser to complete the final inspection certifying the home is 100% complete per plans and specifications and re-certifying value of the home has not decreased.
Provide copy
of Certificate of
Occupancy or the
final sign-off on
Building Permit (or
equivalent) from Building Department.
If you chose a “One-Time Close” construction loan and the documentation used to verify your income, credit, and assets are over 120 days old, updated documentation will be required from you to properly convert the loan to permanent financing. (EHL will contact you within a couple of months of the home being completed in order to obtain this documentation in plenty of time).
Q. Who is responsible for making sure all of the bills are paid for the construction of my home?
A. Ultimately YOU have the final responsibility for making certain that all bills for work completed on your property are paid EVEN IF YOU HAVE PAID YOUR CONTRACTOR IN FULL. Working with a reputable builder will help to ensure all bills are paid as agreed, but it is your right as the consumer and the owner of the property at risk, to ask the builder for proof of payment of all bills associated with the construction of your home. (Typically “Lien Releases” are the surest form of proof.) We highly recommend you familiarize yourself with your state’s lien laws and practices in order to properly protect your property from potential mechanic’s liens.
Q. What is a mechanics lien?
A. “Mechanics Lien” is also known as a “Construction Lien” and is a claim for payment made against your property by those parties who completed work on your property, but did not get paid in a timely manner. The primary people who would be in a position to file a Mechanics Lien include general contractors, subcontractors, laborers, and material/equipment suppliers. Trucking companies that transport materials can also be entitled. A Mechanics Lien may have a higher lien priority than other liens recorded before it depending on when the work was completed and/or materials were provided. Those who have not been paid in a timely manner have a legal right to place a lien against your property. If you receive a notice to enforce a lien, take the notice seriously. Let your contractor and EHL know you have received the notice. Find out what arrangements are being made to pay the sender of the notice. If EHL receives a Lien Notice, we will place a “Hold” on your account and no further draws will be provided until the issue has been resolved and the lien notice released.
Q. What if my home is not completed by the end of the construction period?
A. You will need to apply for a loan extension from EHL. Please review the EHL form titled: “One-Time Close and Two Step Custom Construction Loan Guidelines and Practices” for details on EHL’s current extension policy.