This is a really popular question among those who are applying for a renovation loan and for good reason. Of course your contractor would want to know how he is going to get paid. I hope this article provides some clarification for anyone who needs it.
When you close on your loan the funds designated for your project would be placed into an interest bearing renovation escrow account. Depending on what type of loan you closed with would dictate how and when your contractor would get paid. Below are some examples on how the draws work for different loan types.
If you closed with a FHA 203K streamline then:
35% of the funds designated for your project would be disbursed to you and your contractor shortly after closing by way of a 2 party check. The remaining 65% would be given when the project is complete and a final inspection has been performed.
If you closed with a 203K standard then:
No funds would be given upfront. There are certain cases where an exception would be made but only when there is a special order item involved and the supplier requires a deposit. With this type of loan there is a HUD consultant involved and he and your contractor would agree on how many draws are needed to complete the project (In most cases you will not be able to exceed 5 draws). When the contractor completes parts of the project you would call up the consultant to come out and do an inspection. After the inspection is done the consultant would let the lender know that it’s ok to release funds to the contract. As the borrower you have a choice on this loan to have the funds disbursed with a 2 party check, a check made payable solely to you or you can even have the funds wire transferred into you account.
If you close with a conventional renovation loan then:
The funds are disbursed the same way as the 203K standard but instead of having inspections done by a HUD consultant they are done by a third party loan management company.
Want or need more information?
203K Mortgage Master 