Why Contractors HATE Construction Loans

So, you’ve been planning a major renovation for months now. You finally found a contractor, and you’ve started looking for a construction loan. Hold up! There’s something you should know: contractors HATE construction loans. And you may not love using one either. But why?!?

They’re A Lot of Work

As much as you don’t like extra paperwork, neither does your contractor. And with a construction loan, there’s a lot of extra steps required of your contractor throughout the process.

Here’s a breakdown of how it works: your renovation funds are held in an escrow account and typically distributed in five draws throughout the project. When the contractor makes a request for a draw, they have to go through the individual process for that specific bank, which chances are—they’ve never done before. Then the bank has to order an inspection from a third party, which can take anywhere from a few days to over a week. After the inspection, the contractor and the homeowner will have to sign approvals for the additional draw. (Some lenders may even require a mechanic lien waiver, requiring additional paperwork and signatures.)

Once the bank reviews the request, the release of approved funds will again require final signatures from you and your contractor. Often, e-signatures won’t cut it, which means yet another task of delivery. This process is repeated for each draw throughout the project — we’re tired just thinking about it.

They Slow Down the Project

You can imagine how a process like this can really delay your project. For just one loan, your contractor must make a request and wait for inspection five different times. So let’s say it takes a week for an inspector to come out each draw—that could add an extra 5 weeks on to your completion date.

You Don’t Get All of Your Money

What’s more… despite all the extra work, the bank may not even give your contractor the full draw. Some lenders will withhold 10% of each request—known as a holdback—until the end of construction when a final inspection is performed to ensure everything was completed as expected. And let’s just say whenever your contractor has to pay out of pocket to keep a project moving, they aren’t thrilled about it.

Alternatives to Construction Loans

You do have other options! Like a RenoFi Loan, which contractors love. Why? They have no inspections, no major delays. You’re in control of the distribution of the funds, so there’s no time-consuming inspections or paperwork to hold your project up. You’ll come up with a payment schedule with your contractor, so you can keep your project moving forward on your terms.

Every home renovation is unique, but in most cases, a construction loan adds unnecessary work, time, and money for both you and your contractor. For more information about which loan is right for your project, contact us to discuss your options.

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