What are Construction Loans?
Any loan where the money will be used for matters where a Mechanic Lien could attach.
New Construction, Remodeling, Rehab Work and even Landscaping may all be subject to construction loans.
Construction Loan Flow Chart
When a title order comes in, notify Lender and Borrower that no materials may be delivered to the property nor may any work begin until AFTER the mortgage is recorded.
It is a good idea to do a preliminary site visit to see the current status of the property. Look for signs of work or delivered materials. If any signs exist, priority may be broken – see below.
Prepare the Commitment as normal with these modifications:
Require the following be submitted PRIOR to disbursing funds*:
- Detailed Sworn Construction Statements executed by the General Contractor and Owner on Company approved form.
- Agreement to Hold Harmless executed by the fee owner(s)
- Disbursement Agreement executed by the lender, owner and escrow agent.
- Evidence that establishes the priority of the mortgage consisting of priority affidavit and priority pictures taken after the recording of the Mortgage and prior to the commencement construction.
Take Exception to the following*:
- The Policy only insures the amount actually disbursed. Endorsements are required to increase the value of the policy as funds are disbursed.
- The Policy will not be endorsed unless the title is examined for new intervening matters. Any endorsements will not cover new matters, and if any new matters do show of record, the endorsement will take exception to those new matters. The endorsement will also exclude matters of survey.
- The Policy will not guarantee either the completion of the improvements nor the sufficiency of the funds for the completion thereof.”
*Contact Underwriting for specific language to include.
Prior to Closing
Review the Sworn Construction statement. Is there enough money to fund the project completely? What if there are overages (due to change orders or other matters)? It may be worth seeing if there is enough money if there are up to 10% changes in the initial Sworn Construction Statement.
Establish a Disbursement Agreement that sets out at a minimum
- How monies will be disbursed.
- The ability to stop withhold payment if mechanic liens show of record.
- The right to ask for additional funds to be escrowed if the project appears out of balance (i.e. there no longer appears to be enough money to finish the project).
Day of Closing:
- Have all documents signed and executed
- You may want a person at the site to confirm no work has begun or materials dropped off.
- Record all documents to be recorded, including the mortgage.
- Do a site visit and take priority pictures after recording the mortgage.
- If any work has begun, or if any materials have been delivered, the file no longer has “priority” and liens may attach with priority over the loan. Contact underwriting for instructions.
- If no work has been done and no materials delivered, disburse funds.
- Issue the policy immediately. Some lenders will request the policy not be issued until the construction is completed, but that does not provide insurance coverage, may leave the agent exposed to claims that should be covered by the policy, and does not allow the agent to earn all appropriate fees and premiums for work to be done.
At each draw request, perform a new title check. If title is clear:
- Issue a new endorsement to the policy increasing the value of the policy to the total amount issued to date.
- Confirm all mechanic lien waivers from the last draw have been received.
- Confirm there is still enough money to finish the file. If the title is NOT clear, advise all parties and consult the Disbursement Agreement (see above).
- At each draw request, the agent will need to perform another title check and then issue an endorsement to the policy, sometimes called an “up the amount” or “disbursement” endorsement. This raises the amount of coverage to the cumulative amount that has been disbursed. Also, the agent must make sure all parties to get paid have been paid and have provided final lien waivers for the same. Finally, the monies remaining to be disbursed must remain sufficient to complete the work remaining.
End Loan Requirements
Obtain the final Sworn Construction Statement, Full and Final Lien Waivers, Agreements to Hold Harmless, Builder Contractors Affidavit and Agreement to Hold Harmless. Any final monies should only be exchanged for full and final lien waivers. Make sure the Waivers are signed by a person of authority.
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