In our renovation consulting business we frequently get asked how contractors get paid.
Renovation Loans pay contractors as follows;
Up front monies, there is some difference between FHA and conventional loans. PHI will do a material draw for the lender to make sure funds are allocated correctly.
- Conventional Loans – Lenders will generally provide enough up front monies via 2 party check to borrower and contractor to get to the first draw, usually 20-25k maximum. Less on smaller projects.
- FHA Loans – Lenders are required to follow the FHA guidelines which allows for up front monies for big ticket items (windows, cabinets, mechanical equipment etc.) paid directly to the vendor.
We recommend speaking with your lender for more specifics on their policies. In general, we recommend being very conservative with providing contractors with upfront monies. We also strongly recommend that your contractor deliver the materials purchased with up front monies to your house and have them stored under your lock and key.
Please keep in mind that high-quality contractors have strong vendor and subcontractor relationships and adequate working capital needed to reach the first draw. If your contractor is missing the above, it’s a warning sign about their ability to complete your project timely. If you need contractor referrals we may be able to help.
Progress Draws – Funds are released based on a percentage of completion for each of the line items listed on the draw request. The schedule of values is the same one listed on the specification of repairs you closed with. In general we visit for every 20-35k worth of completed, more for larger projects. 5 draw payments are funded into your loan, more draws may be possible if needed. Contractors asking for small draw amounts are a sign that your contractor may lack the financial capability to undertake your project and finish it timely.
Read more on this here https://www.phinj.net/203k-and-conventional-renovation-consulting/
