Tag Archives: construction loan

How Are Funds Dispersed From a Construction Loan?

How Are Funds Dispersed From a Construction Loan?

Reader CASSANDRA in ROXBORO writes:

“When applying for this construction loan as each job is done will the money be dispersed as each job is finished and inspected.? Do you know any in North Carolina that does the whole build or has turkey homes?”

Mike the Pole Barn Guru writes:

Draw requests all start with a draw schedule. A construction loan draw schedule is a detailed payment plan for your construction project. These are typically split up into various milestones or overall project phases.

With a draw schedule in place, an owner or project manager will submit a detailed report of work completed at certain points. This report should be substantiated by a bundle of various documents offered as work performed proof. If everything checks out, payment will be released. This bundle is commonly referred to as a draw request.

A draw request isn’t just a simple form. It’s a document bundle submitted to your lender requesting funds to be released. These documents are meant to provide clear evidence work has been completed and support costs associated with reaching a draw milestone.

Draw amounts are based on cost breakdown for each particular milestone. Documents required for each draw depends on your lender (and sometimes your state).

Critical inclusions in a draw request are invoices and receipts for work performed during draw period. These should be collected from all subs and suppliers before submitting a draw request as justification for funding. Whether for work performed, or materials purchased, they should be sufficiently detailed to justify a draw request. Having all your invoices properly organized before submitting them to your lender, can save them time reviewing request, and can get you paid more quickly!

A values schedule is a document listing all line-item tasks needed to be completed along with an estimated budget for each task. Each line item should be updated with each draw request. Tracking work through a values schedule helps keep track of how much money has been spent with regards to work completed to date amounts.

Change orders come up on just about every construction project. Anytime there is a modification or deletion to original construction plans; a change order will arise. Change orders will provide a detailed changes made description, and any additional time costs incurred by your contractor.

Lien waivers should be submitted along with every invoice. These will typically be conditional waivers since payment has not yet been made. Because a mechanics lien filing is the most prominent form of risk concerning lenders, a draw request will likely be postponed until all lien waivers have been submitted.

Finally, some overview or explanation of your job’s progress will typically be required. This might be as simple as identifying milestones reached or providing a checklist of itemized tasks needed to be completed to substantiate your draw request.

There’s not a substantial difference between draw requests and pay apps, but it is more than just semantics.

Payment applications are submitted to a customer as an invoice for performed work. Contractors and subs will submit payment apps to then be verified by owner or project manager, and ultimately submitted as a draw request.

Draw requests refer to bundle documents submitted to your lender in order to draw payment for work performed. Draw requests are usually made by an owner or project manager, made up by any number of pay apps and other supporting documents collected by prime contractor(s).

While both draw requests and payment applications feature similar documentation, these terms shouldn’t be confused. It is more accurate to refer to draw requests when exclusively discussing demands for payment from a lender. Conversely, when payment requests are submitted to some other party (like an owner or contractor), “payment application” is more appropriate.

Once a draw request has been submitted to your lender, their review process begins. Your lender needs to review all documents, order and approve inspections, and verify all work claimed to be completed, has been. This draw approval process ideally takes about seven business days. However, depending on size, complexity, and amount of draw request documents, this can take much longer.

When a lender has to request additional documentation or has to verify certain information as correct, payment is slowed down for everyone on your project – and it has a snowball effect. It takes time for payments to wind through payment chains. Funds must reach each chain link, and every time payment changes hands, there’s potential for additional delays. So, when submitting construction draw requests, it’s essential to have all information accounted for and organized. Streamlining your lender’s release of payment means streamlining payments for even construction payment chain’s lowest tiers.

You may want to give strong consideration to acting as your own General Contractor:

https://www.hansenpolebuildings.com/2020/02/does-my-barndominium-need-a-turn-key-general-contractor/

https://www.hansenpolebuildings.com/2019/11/a-contractor-for-your-new-barndominium/

https://www.hansenpolebuildings.com/2019/11/a-contractor-for-your-barndominium-part-ii/

https://www.hansenpolebuildings.com/2019/11/a-contractor-for-your-barndominium-part-iii/

Building Over Existing Slab, Blueprints for House, and Pole Building Finance

This week the Pole Barn Guru answers reader questions about building over or on an existing slab or concrete, whether of not Hansen sells “just the blueprints” for a pole barn/house, and lending for a pole building set on foundation/footing/wall.

DEAR POLE BARN GURU: In Arkansas, I want to build a pole barn (or similar) on an existing 40×45 concrete 4” slab. I want the building to be tall enough for 14’ garage doors. Building will be used to store a motor home and tractors and trailers. What is the most cost efficient (but safe and lasting) way to build it- dig holes outside of the existing slab, saw cut the slab and dig holes for the poles, or do stick frame on top of the existing slab? STEVEN in EAGLE CREEK

DEAR STEVEN: Let’s begin by eliminating stick frame as there is no guarantee your existing slab is adequate to support perimeter walls and (more importantly) Code prohibits stud bearing walls tall enough for your overhead doors, as well as truss spans over 36′, without your building being engineered (https://www.hansenpolebuildings.com/2020/08/stick-frame-and-some-limitations/). Stick frame is also very material inefficient.

I have done concrete saw cutting before and don’t plan upon a repeat performance – leaving digging holes as being easiest, most cost effective and structurally sound design solution. 42′ x 48′ would fit nicely and you could concrete infill areas between splash planks and existing slab with premix.

 

DEAR POLE BARN GURU: Do you sell just the blueprints for a pole barn/ house.

MICHAEL in LAKE PANASOFFKEE

DEAR MICHAEL: We can create your ideal dream floor plan whether you order your building from us or not. Every barndominium Hansen Pole Buildings provides is 100% custom designed to best meet the wants and needs of our clients and their loved ones, please see #3 here to assist in determining needed spaces and approximate sizes, and to have professional floor plans and elevation drawings produced affordably. https://www.hansenpolebuildings.com/2021/02/a-shortlist-for-smooth-barndominium-sailing/
Structural, engineer sealed, plans are only available with your investment in a Hansen Pole Building. This is due to proprietary products specified by our engineers and available only through Hansen Pole Buildings.

 

DEAR POLE BARN GURU: Hello Guru! I’m currently researching the building of a post frame home/workshop/garage. I was looking at getting a construction loan. The bank will finance the purchase of a building kit but they want it to have a foundation footing and wall. I’ve looked at the Sturdi Wall brackets for an anchor system and the laminated 2×6 posts. My question is do you design buildings with foundation walls? Or do you have a better recommendation? Thanks for your help.- JEFF in PORT ORCHARD

DEAR JEFF: We provide many fully engineered post frame buildings using wet set Sturdi-wall plus brackets attached to concrete, block or even ICF foundation walls. Personally (if I was not allowed to do what I feel is a best route – embedded columns) my preference would be wet set brackets in poured concrete piers. If you have a chance, please forward to me your lender’s actual written policy requirements for review, as it may give me some better insights.

 

Busting Post Frame Barndominium Myths

Busting Post Frame Barndominium Myths

Yep, I have been web surfing again and I came across a stick frame building contractor’s website who obviously either doesn’t understand fully engineered post frame construction, or just frankly doesn’t care to add it to his arsenal of design solutions. My comments are in italics.

MYTH #1. MOST BANKS WON’T OFFER CONSTRUCTION LOANS ON POST FRAME POLE BARN HOUSES.
Many lenders refrain from offering traditional mortgages for pole barn homes. For example, Freddie Mac and Fannie Mae will not offer these loans at all.
The small percentage of entities that do offer mortgages for pole barn homes will typically have much higher requirements, because they’ll be using internal money to finance it.
They’ll likely require a 30% down payment (and oftentimes, more than this).

In reality, a fully engineered post frame building is no different than any other wood frame steel roofed and sided home and any lender will approve a mortgage for one as long as you do not use terms like “barndominium”, “pole barn house”, “post frame house”, etc. Apply the K-I-S-S method (Keep It Simple Stupid) and refer to it only as being a fully engineered, custom designed, wood frame home with steel roofing and siding. Period and 100% factual.

But won’t my lender send out engineers and inspectors who will “catch” me building a barndominium, shouse or post frame home? No. Your lender will be concerned about progress, not how you are getting there.

Before going to a lender you will need a place to build (land), blueprints (floor plans and elevations) and a budget (or contract subject to finance approval with a builder).

MYTH #2. THERE ARE NO FOOTERS IN POST FRAMES
Without having footers to protect the concrete slab from freezing, there is the potential that the concrete slab can move or heave around the edges in cold weather. In turn, this can shift interior walls, resulting in damage to drywall finishes and trim.
If you do go with post frame construction, you will have to add footers to stay in code compliance of the IRC. This will add that cost back into the total price of the home.

Your fully engineered post frame home is 100% Building Code Compliant and most typically has pressure preservative treated columns embedded in ground with both concrete footings and bottom collars. Alternatively your home can be mounted to steel brackets set in concrete piers.

Either of these are designed to extend to or below frost lines or are frost protected by use of insulation. Footers themselves do not protect a concrete slab from freezing and heaving, using rigid insulation around slab perimeters is required for either stick frame or post frame. With fully engineered post frame, there is no need to incorporate thickened slab edges or continuous concrete footings and foundations.

MYTH #3. POST FRAMES WILL HAVE LARGER SPANS IN THE ROOF TRUSSES
This is an issue because they’ll have to be filled in before you can hang the drywall.

If you hang drywall “as is,” it will all sag over time, causing structural damage (and a pain in your wallet). Adding this extra framing after the fact will add to the total price tag again.

Most cost effectively your fully engineered post frame building will have double trusses every 10 to 12 feet. If you desire to insulate at ceiling lines, ceiling joists are placed every two feet to adequately support drywall. This combination of double trusses and ceiling joists will still be less expensive than conventional stick framing’s trusses every two feet with structural headers required in walls. By widely spacing trusses, it allows for greater flexibility in locating doors and windows in exterior walls.

MYTH #4. EXTRA FRAMING BETWEEN THE POSTS WILL BE NEEDED
As opposed to traditional wall building, you’ll have to build the walls between the posts after you build on the post frames. This is an added cost to the post frame structure that has already been built.

We can tell this builder has never built (or probably seen) a fully engineered post frame building with bookshelf girts every two feet. All exterior wall framing is taken care of at initial installation, you get a deeper insulation cavity and a better surface to drywall. https://www.hansenpolebuildings.com/2019/09/11-reasons-post-frame-commercial-girted-walls-are-best-for-drywall/

MYTH #5. INSULATION COSTS ARE HIGHER
Your pole barn home will require more insulation on a post frame wall because the walls are thicker than the typical two-by-four construction. Therefore, the cost of insulation will be higher to fill this cavity.

Would you really want an electric bill based off of R-13 insulation in a two-by-four exterior wall? Engineered post frame construction allows for thicker insulation cavities – reducing your energy costs for your barndominium’s lifespan.

MYTH #6. POST FRAME CONSTRUCTION IS TYPICALLY NOT USED WITH BASEMENTS.
Post frame construction is not very conducive when building on a basement, as the basement walls will be made from poured concrete. Trying to adapt a post frame construction to a basement will end up with higher costs than traditional home building techniques. The bottom line: If you want a home with a basement, post frame construction is not the best choice.

Your fully engineered post frame home can easily be engineered to attach to a concrete basement foundation, ICFs or even incorporated into a Permanent Wood Foundation, at similar or lower costs than stick frame.

Post Frame Home Construction Financing

Most people building their own post frame post frame home (barndominium or shouse included) need some amount of post frame home construction financing.  (shouse=shop+house)

Some important things to keep in mind with construction loans:

Obtaining one takes more time and financial investment than a conventional loan (loan on or against an existing building).

Lenders require more documentation – building plans, budgets, time lines, etc.

“Single Close” loans finance land and post frame home and serve as long-term financing.

“Two Step” loans finance land purchase and construction. New post frame home owners must refinance with a conventional loan upon completion.

Plan on needing at least a 20% down payment. In some cases, if property is free and clear, some or all of land value can be applied toward down payment.

Your lender’s equity will be based upon whatever is least – cost or finished appraised value. Be wary – some items or inclusions have a greater cost than their finished appraised value.

Typical payments are interest upon portion of funds used during construction.

Borrower/builder will take draws as needed to cover materials and labor completed. In an event a general contractor is hired, do not give him or her direct access to funds without you having to approve.

Borrower and builder must be fully approved by lender. This is one of the few cases where I recommend using a general contractor – but only if your lender will not allow you to self-build. 

Do NOT apply for your loan telling the potential lender it is a barndominium, pole barn/building or post frame home, etc. Your post frame home should be listed as a “wood framed with a concrete foundation”. Period.

Post Frame Home

While it sounds ideal to build a post frame home for your specific wants and needs, processes of applying for and closing a construction loan will require a much greater commitment of time and financial resources compared to financing an existing home with a traditional Conventional Mortgage. This is because those banks funding construction loans are investing a considerable sum into an intangible asset, one not yet existing. As such, their requirements for documentation and a greater down payment from buyer are greater than if they were financing an already existing home.

There are effectively two types of construction loans, and while they may go by different names by banks offering them. 

A single close construction loan is a single loan financing property acquisition and post frame home construction, it serves as long term financing as well. Since this bank is taking a leap of faith the home will be built “as advertised” with plans and specifications they’ve been provided, they’re still taking a risk in home buyer and builder. If something goes wrong during construction, they could end up being lien holder on a partially constructed post frame home. Since banks are NOT in the business of building homes, they will mitigate this risk charging higher interest rates on construction loans. Greatest risk to a bank closing a construction loan is having either builder or buyer default during construction and higher rates allow them to spread this risk.

A Two Step loan differs as home buyer will close on one loan solely used to finance land purchase and dwelling construction. Once completed, post frame homeowner refinances construction loan with a permanent conventional loan of their choosing.

Both single close and two step loan have their distinct pros and cons and each individual home buyer/builder needs to evaluate those to determine which is best. While a single close loan only requires a borrower to sign one set of loan documents and they have one loan covering both construction and long term home financing, rates at closing are anywhere from .25 to .5% higher than a traditional conventional loan may be. Again, this is due to construction lender’s added risk. Two step loans offer client an ability to choose (after completion) a permanent loan of their liking. Typically this will be at a lower rate than a conventional loan, but two loan closings result in two sets of closing costs, two signings, etc.

Variables a post frame homeowner should consider include length of time they plan to keep the home, current interest rate environment (are rates rising or falling?) and their own risk tolerance knowing rates can and probably will either go up or down while the home is being built.

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