Construction loan FAQ

Yes. A builder’s contract will either list one base cost for construction of the home (fixed-price), or include an estimate for costs plus a flat builder’s fee as either a number or a percentage (cost-plus).

Fixed-price. Vendors (materials) and subcontractors (labor) are either paid by the builder, who then submits a draw request for reimbursement, or are paid directly by CFS. The builder’s administrative fees and profit are included in the set fee and are paid by CFS as the home progresses toward completion. Any overages in the budgeted line items are the responsibility of the builder and will not be funded by CFS, unless shortages in the budgeted line items can be applied to other areas of construction or paid to the builder as project management fees. The budget is not shared with the homeowner.

Cost-plus. Vendors and subcontractors are paid directly by CFS or as reimbursements to the builder or homeowner. The builder earns administrative fees and profit either as a percentage of the home’s cost or as a set fee, paid by CFS as the home progresses toward completion. Any overages in the budgeted line items are the responsibility of the homeowner and will not be funded through CFS unless shortages in the budgeted line items can be applied to other areas of construction. The budget is shared with the homeowner.

CFS will require the builder to complete a Builder Profile. CFS will contact the builder’s previous clients to make sure they were happy with their experience. CFS does not review a builder for quality or become involved in contract negotiations. It is the homeowner’s responsibility to do their due diligence on the builder, to be satisfied the builder has the experience, financial integrity and stability to complete the improvements agreed upon.

A draw is a request to have funds disbursed from the construction loan. The disbursements cover specific expenses incurred during construction of the home, and correspond to the items listed in the builder’s construction budget.

A construction draw and disbursement schedule may be included in the builder’s contract. See the complete draw disbursement instructions.

No, but we do ask that draws be limited to one per week. The contract should include a mutual agreement on the number of draws the builder will submit to CFS.

CFS requires three compliance inspections on every home: before the foundation is poured, before insulation is installed, and final. Inside city limits these are the city’s permit inspections; outside city limits the builder hires a licensed real estate inspector or an engineer and pays them directly. For other draws, CFS may accept builder and homeowner photos showing the work is complete.

Pickup and USPS delivery are free. Wires cost $30 and FedEx $50, deducted from the draw. See the draw procedures for details.

CFS does not require draw requests to be approved by the homeowner before processing, since homeowner involvement in construction varies with each loan. Whether homeowner authorization is required before processing is an agreement between the builder and the homeowner.

Sticking to the construction budget is extremely important. With a fixed-price contract, if CFS determines a draw request is over the budgeted amount, only the budgeted amount will be paid and the builder must cover the difference, unless there are savings in the budget on items confirmed 100% complete. With a cost-plus contract, the homeowner must cover the difference, unless there are savings in the budget on items confirmed 100% complete.

Changes during construction can create problems if not handled properly. Major changes must be agreed upon by both homeowner and builder through a change order and approved by CFS before the change is made. If possible, the changes may be included in the construction budget and paid as part of ordinary draw disbursements. In some cases the homeowner will be responsible for paying for changes to the original floor plans or specifications.

Contact CFS as soon as you decide a change is desired or required. That gives us the chance to work out the best course of action for paperwork, inspections and draw requests. The sooner you notify us, the smoother your project will go.

Builder contracts typically specify the time needed to complete the home: 6 months (180 days), 9 months (270 days) or 12 months (365 days). That time is for active construction only. It does not include the time needed for HOA approvals and city permits, or delays caused by weather or unforeseeable events. The total time from loan approval to mortgage refinance should be agreed upon, as it determines the term of the construction loan.

If construction is delayed beyond the agreed timeline, the homeowner may incur additional costs, including legal and recording fees for a Loan Modification and Extension Agreement, as well as additional interest on the construction loan. The contract should say who is responsible for those costs. When a Modification and Extension Agreement is needed, it costs about $150 on average, including the attorney’s fees and county clerk recording fees.

Retainage, or the builder’s hold-back, is the portion of a builder’s contract that is not covered by the construction loan. Even if the construction loan does not require a hold-back, the borrower may still hold back 10% of the builder’s contract until the home is complete, has its Certificate of Occupancy, and is refinanced into permanent financing.

Interest is charged on the disbursed balance, not the whole loan amount. Borrowers are billed on the 1st of every month for the interest due on their loans. CFS reserves the right to stop disbursing draw funds if interest payments are delinquent.

Pay interest online.