The Home Buyer's Korner

Information presented should be used for educational purposes only.

July 14th, 2014

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A General Outline of the Renovation Draw Process

When securing a renovation loan one thing in common, both the contractor and the home buyer want to know is how the draws are disbursed.  It’s critical information on how and when your general contractor gets paid and a major aspect of the renovation process to know upfront.

Some lenders manage their draw process well and some lenders are terrible at it, so I recommend you ask for references and have your loan officer explain theirs.

Let’s start with my favorite renovation loans, the FHA 203K. I like this loan because it’s easy to qualify for; it’s versatile in its scope of repair and has flexibility with the draw process, if done correctly. Basically, the HUD Consultant and the General Contractor can put their heads together and determine what’s best all parties. Whether it’s two draws or five and a simple discussion between the Consultant and the Contractor can hash it out.

Often, funds are not disbursed upfront, but some lenders will disburse funds at closing from 35% to 50% of the estimated repair cost for an FHA 203K Streamline to get the project started, ask your lender early in the process as to their policy. Some jobs are material heavy and require large outlays of funds to get started. In those cases an upfront, draw is likely to be required and if your lender doesn’t offer an initial draw at closing, your General Contractors often has their own line of credit to get a project started.

Each draw must be signed off and requested by the General Contractor, Property Inspector and you the Home Owner. The FHA 203K, Fannie Mae HomePath or HomeStyle loans disburse funds in the same way, with few exceptions. Fannie Mae HomePath or HomeStyle Renovation Loans use third party home inspection companies like Granite Loan Management or Trinity Inspections. The HomeStyle loan is usually capped at four draws instead of five

Depending on the lender, you should get 35%-50% of the funds within 5-7 business days of your initial draw request and the rest of the funds when the work is completed, inspected and the final title update is run.

Lenders complete inspects to make sure the work has been done as required; run title update to make sure the all contractors have been paid and no one has placed any liens on the property. Checks are generally cut as two party checks made out to both the homeowner and general contractor.

It’s a pretty straightforward process and as long as your contractor is doing quality work and doesn’t deviate from the scope submitted to your lender.

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