The ultimate construction financing cheat sheet

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Tips for a smooth loan closing process when financing construction

When you are in the market for construction financing, there are a few things you need to keep in mind during the loan closing process. One of the most important is ensuring you have all the necessary mortgage closing documents and information ready. 

After a loan closes, the loan administrator, who follows a precise set of guidelines for loan administration, is primarily in charge of taking care of the mechanics of the mortgage. 

Suppose a purchase, an agreed-on closing, and previously paid hard and soft costs are involved. In that case, development loans are typically partially funded at loan closing to cover a portion of property acquisition costs

Then, typically monthly, money is advanced based on a draw request that adheres to predetermined guidelines to pay for hard and verifiable soft costs.

The ultimate construction financing cheat sheet

What documents are required before the first advance

The following set of documentation and data is often necessary before the first construction financing advance, which typically happens at or soon after the loan closing:

  • The agreement between the property developer and the construction manager or general contractor.
  • Budget.
  • A complete set of specifications and plans.
  • Worker's compensation certificates.
  • Certificates of current liability insurance from the developer and subcontractors
  • Licenses for any trade that the municipality demands.
  • A duplicate of the developer's certificate of builder's risk insurance.
  • Copies of the general contractor's and the key subcontractors' surety bonds, if applicable, for the entire project.

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Requirements for the construction financing process

The building loan agreement describes the requirements for the initial advance and each future advance. 

The first step is when a borrower submits a hard and soft cost requisition to the lending officer or the designated loan servicer. He must submit the requisition a week before the anticipated loan distribution date. 

In parallel, the lender's inspecting engineer receives the request's hard cost portion. It is typically sent directly by the borrower to save time.

The documents agreed upon and referred to in the formal loan documentation make up the requisition.

They should contain documents comparable to or equivalent to an application and certification for payment and a continuation sheet, lien waivers, copies of invoices and payment documentation, and any other documents the lending institution may request

Additional documentation, such as copies of invoices or evidence of payment for expenditures like insurance, taxes, and other expenses that the engineering consultant is not responsible for reviewing, may also be included in the requisition package.

Each subcontractor will initially submit his requisition for approval to the general contractor or construction manager. After evaluation, it is included in the whole requisition package submitted for approval to the lender as the foundation for funding the property development project. 

For the application and certificate for payment form, backup information is provided on a continuation sheet or a similar form. It lists the work by sub-trades, specific contractors, or divisions.

Requirements for the construction financing process

1. Lien waiver

The borrower includes partial and final lien waivers from the principal contractors and subcontractors with the requisition package.

A lien waiver is a declaration by a contractor that, as of the closing date of the waiver and up to and including that date, he has not lodged any mechanic's liens against the real estate.

As the contracted work is completed, partial lien waivers are submitted. When the work is finished, a final lien waiver is provided.

2. Borrower's declaration

The borrower must also submit additional paperwork requested by the lender. Although the exact documents depend on the lender, an affidavit or certificate is usually included.

Other affidavits are frequently needed before the first advance and are typically obtained at or before the loan closing, but not typically on each succeeding advance.

3. Additional information

Change order forms are a part of the complete requisition package whenever required. They come with supporting documentation, such as an invoice or contract outlining the work to be done, to back up the change.

Be informed that change orders do not affect the initial budgeted loan amount; this amount is fixed at closing. 

The money to finance the additional amount required to complete the project must come from developer sources if overruns on a specific budget line cannot be funded from a contingency, miscellaneous, or line elsewhere in the lender's budget where there are cost savings.

The lending institution may request forms or spreadsheets in addition to the materials presented so far.

Inspecting engineer's report

The borrower will request that the lender's inspecting engineer visit the project to assess the work completed and confirm the presence of stored items a few days before or directly after a requisition filing. 

After that, the engineer writes a report for the lender outlining what he observed, his concerns, and any ideas and suggestions he may have. 

During his visit, he checks the status of the modifications made and the stored materials' kind, quantity, and security.

He examines and frequently alters the amounts requested by the borrower and suggests funding the hard-cost amounts. Based on the current situation and the work made so far, he assesses the project's potential for timely completion. Images should be there in the report. 

It's critical to remember that the engineering consultant lacks all authority and capacity to make decisions or provide approvals that could bind the lender. 

The lending officer is responsible for making all loan, credit, and administrative decisions, and senior management may also be involved, depending on his level of responsibility. 

The lender can substitute a different expert for the construction consultant at any time. The critical thing to remember is that although the lender has the power, they also have control and responsibility.


Construction loan funds are advanced to the borrower as construction progresses. The construction loan agreement will specify when and how construction advances are made.


Hard cost

A budget-line-by-budget-line basis is used to procure and advance hard costs, reflecting the legal contract between the owner or general contractor and each trade contractor. 

It, in turn, affects the overall budget (including change orders) required to complete the project.

The hard cost to be advanced is calculated after adjusting the work accomplished and subtracting for retainage.

The consulting engineer is meant to have reviewed each hard cost line item for each request; thus, it is not the administrative person's responsibility to do this. 

The administrative person's first duty is to cross-check the forms to ensure they add up and agree. They almost always are, but if they are not, the administrator must point out the errors and look into them. 

The administrator may quickly identify variations by contrasting the current demand with the previously approved and financed one, especially if the borrower has made unforeseen adjustments to the budget. 

He needs to call the borrower and get clarification if there are any unanswered questions.

It not only spares him the time he would have otherwise spent pondering paperwork, but it also informs the borrower or the staff member who created the request to approach things differently the next time to minimize misunderstanding and potential errors.

Soft cost

Because soft costs are typically not examined by the consulting engineer, they require more of the administrator's focus. 

One line that is calculated and verified by the administrator is interest costs. The time to obtain back proof of payment is typically after the requisition has been submitted. Hence, fees and expenses that may be verified with paid invoices and copies of checks are among the others.

Receiving the title continuation

The administrator must ensure that all monies advanced will continue to have a senior position about other claims after he is satisfied with the requisition package. The administrator checks to see if any liens have been posted by calling the title firm. 

If liens have been posted, the title firm must bond, release, or insure them. Regardless of how the liens are handled, the administrator must be given a notice of title continuation or an endorsement of the title insurance policy. 

Both of these must be dated as of the applicable advance date and state that there have been no changes to the title's status since the previous advance.

Reduction of retainage

Retainage is nearly always computed as a percentage of the hard costs that the borrower requested for the completed work.

It is customary to reduce the loan's hard cost retainage amount after a predetermined period or overall completion percentage to enable the borrower to pay off contractors who complete their work well before project completion.

Reaching a predetermined percentage of completion for the entire project and releasing retainage on a contractor-by-contractor basis are two methods frequently used to start a retainage reduction.

Reduction of retainage

Percentage of completion approach

With the percentage of completion approach, a general decrease in retainage is permitted if the project completion reaches an overall percentage decided by the construction consultant.

This strategy gives the borrower some flexibility in negotiating and lowering the retainage under specific trade contracts.

Contractor-by-contractor approach

As mentioned in each construction contract, precise retainage reductions are typically reflected in the contractor-by-contractor approach's reductions. 

In either case, as the project moves forward and different trades finish their work, the overall retainage amount that the lender is holding back won't decrease suddenly but will instead level out over time. 

Please note that the decrease in retainage does not make more money accessible to the borrower. Instead, the lender's consulting engineer gives those payments directly to contractors who have finished their work.

Notably, the contractor should always be compelled to sign a lien waiver before any retainage decreases. Upon completion, the contractor must sign a final lien waiver before receiving the final payment that includes all retained funds.

Materials stored for construction project

Materials stored for construction project


For stored materials, there is a column on the continuation sheet. While some lenders permit advances for commodities in storage, others do not. 

The disparity can be attributed to a few factors. The most evident is that unutilised or uninstalled building supplies may "walk" off the job site. 

Another is that the developer might overorder items to earn a more significant advance; nevertheless, you can keep these materials on the site until the engineering consultant's inspection is finished. You then must redistribute the material to another site the borrower is building.

Other specific requirements include that the materials are clearly marked as the borrower's property, that the bills of sale and contracts under which they are being provided are acceptable to the lender and the construction consultant, and that they are insured against theft, loss, and casualty, that the lending institution is listed as a named insured, and that the borrower owns or will own the materials following the payment of invoices.


You may be asked to fund materials that are not at the job site or maybe do not exist, in addition to the risks associated with funding materials for the job site. 

Most of the time, such supplies come from vendors who demand deposits and down payments before ordering materials for fabrication or delivery or from specially fabricated components and assemblies produced off-site. 

Before a lender funds off-site materials, there are typically more restrictions placed on their physical and financial security than on-site materials.

Many lenders include a provision for deposits and off-site materials when they draft the initial loan documentation. Other lenders' policies prohibit any financial assistance with deposits and stored goods.

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Project funding: overfunding vs underfunding

Lenders tend to underfund projects. This is expected given senior management's widespread aversion to risk at most lending institutions. Less money at risk equals less money advanced. 

Regrettably, the caution that results in underfunding could make it riskier. Suppose a lack of funds forces the developer to be slow in making payments or to make only partial payments to contractors, municipalities, etc. 

In that case, the project is more likely to be affected by delays, poor artistry, higher contractor and trade costs, fines and late charges, an increase in loan exposure resulting from a possible increase in the loan amount to cover budget overruns, delays in sign-offs, and ultimately nil completion.

In contrast, modestly overfunding requisitions can typically minimize risk since it can improve the likelihood that a project will be finished on schedule by streamlining the work process. A project is worth much more than one that is almost finished.

Project funding - overfunding vs underfunding

How to keep the loan in balance?

It simply implies that there is always enough money from equity and debt sources to finish the development as scheduled. This is known as keeping a loan in balance.

The loan is always out of balance whenever the development budget is short. If the borrower has enough equity and liquidity to invest more money in the project, overruns brought on by construction delays, replacing original materials or fixtures with more expensive ones, or poor judgment during the initial budgeting process are not a problem for the borrower. 

However, there are situations when the borrower will argue with the lender's (or anyone else's) assessment that there are defects, even when it is evident there are. It is especially true if the borrower is undercapitalised. 

He either does not have the luxury of spending more of his capital to finance the project in this instance, or he does not wish to do so.

Before approving an advance, the lending officer may consider requiring the borrower to invest the amount of the perceived deficiency in the project if the administrator, engineering consultant, or lending officer determines that the loan's allocation to a particular budget line is insufficient. 

Suppose the administrator, engineering consultant, or lending officer determines that the portion of the loan allocated to a budget line is inadequate before an advance is approved. 

In that case, the lending officer may require the borrower to invest the amount of the perceived deficiency in the project, change the budget line allocations by moving funds from areas where there appears to be an over budgeted line to the deficient line, or, in atypical cases, depo. 

Deposits are disbursed based on requisitions. If the money deposited is more than needed or there are cost savings on other lines, the remainder might be returned to the borrower.

The requisition cycle

Submitting a requisition is time-consuming and complex, so by the time the borrower has done so, he almost invariably needs the money badly. On average-sized contracts, it can take a week or more for subcontractors to compile and submit their requisitions to the general contractor or construction manager. 

He then reviews the submissions, makes any necessary modifications, puts them together and submits the final requisition package to the lender. 

Two to three weeks will pass before the lender advances on the loan since it can take another week for the lender's inspecting engineer to schedule an inspection at the project site and another week for the loan administrator to evaluate all the paperwork to go through the funding procedures. 

It's time to start the process again in just one more week. It should be noted that, except for the borrower, only a small amount of the requisition cycle is under the control and responsibility of each player in the process. 

The borrower must be able to direct the process from start to finish. This highlights two crucial ideas.

The borrower is aware that while there is theoretically no likelihood that the lender will offer to contribute more money, there is always a potential that they will provide less money than what the borrower is asking for.

As a result, the borrower is biased to request more money than he is entitled to in each request. 

Additionally, one to two weeks' worth of work may have been finished when the inspecting engineer visits the site. The borrower and the subcontractors often project two weeks' worth of labor and stored materials in their requisitions because they know this. 

The lead time between the creation of the request and the receipt of money will be at least partially reimbursed. Projections may not match reality, a problem, and the mistake will likely be on the long side. 

The lender shouldn't be unduly concerned if the borrower requests more than what he or the inspecting engineer deems to be the appropriate amount in light of this bias and the lead time in the procedure, which naturally involves estimation. 

The only time there is cause for concern is when the numbers are both unreasonable and persistently high.

The second point is that the lender should exercise caution before extending credit to a first-time customer who provides subpar documentation. 

Due to a lack of administrative workforce, the borrower is frequently unprepared to go through numerous requisition cycles for small building projects. 

The ultimate result could be a breakdown in communication between the lender and the borrower, which would raise the risk of the construction loan. 

A construction loan advance may be delayed if the lender needs to perform more due diligence because of poor paperwork. The paperwork can be incredibly burdensome on a more extensive or involved project and frequently takes significant time.

A borrower's development team member must examine subcontractor requisitions before being summarized and assembled into a workable package for the lender by a worker assigned explicitly to that responsibility.

Bottom line

After closing, the property development and construction financing process typically go smoothly and in the usual way. However, the procedure can become challenging if a project is having issues, whether as a result of unanticipated delays, cost overruns, or conflict between the staff of the borrower and the lender. 

Frequently, the interaction swiftly devolves into hostility. It is always in the loan officer's best interest to maintain professionalism and objectivity, regardless of how well or poorly things are going. 

He must refrain from making the matter about him. It could harm the construction loan and, more importantly, the lending officer's career, reputation, and self-worth.


What are the sources of construction financing?

There are many sources of construction financing available to borrowers. Some of the most common include banks, private lenders, and government-sponsored entities.

Banks are a common source of construction financing, as they often have experience in this area and can offer competitive interest rates. Private lenders are another option, and may be able to provide funding more quickly than a bank. Government-sponsored entities offer loans insured by the government, which can make it easier for a borrower to qualify.

What is the need of finance for a construction project?

Construction projects are expensive, and unless you have a large amount of money saved up, you'll likely need to finance your project. There are a number of ways to finance a construction project, each with its own pros and cons.

One option is to take out a loan from a bank or other financial institution. This can be a good option if you have good credit and can get a low interest rate. However, it can be difficult to get approved for a loan, and you'll have to make monthly payments until the loan is paid off.

Another option is to finance your project with credit cards. This can be helpful if you don't have the money upfront but need to get started on your project right away.

What are the sources of finance for construction?

There are a few different ways to finance construction projects. One is through bank loans, which can be either short-term or long-term. Construction loans usually have higher interest rates than standard mortgages, and they require that the borrower have a good credit history and a reasonable amount of equity in the property. Another option is to finance the project through private investors. This can be done by selling equity in the project or by borrowing money from friends or family. Finally, some construction projects are financed through government grants or loans. This is often the case with public infrastructure projects, such as roads and bridges.

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