Confusion on how HML dispense loans for rehab

12 Replies

Hi everyone,

I'm looking to use a HML to fund the rehab and 70% of the purchase price of a SFH. My contractor has given me his bid and asked for 25% upfront payment to start work. Here is where my confusion is. Will the HML disperse the whole loan amount to me at the beginning? Or will they break it up into increments? I want to know how the money is typically broken up so that I can pay the 25% to the contractor. Is it different for each lender? If anyone has experience with this I would greatly appreciate it.

Thanks in advance for all your help!

@Adrian Hollifield . You’re finding out how it normally works and why the “low money down” doesn’t really work well.

You’ll need that money to your contractor up front. The work will be done, it’ll be inspected and then the lender will reimburse you

If your contractor is in CA, you have a bug red flag.  They are only allowed to collect 10% or $1000 which ever is LESS up front.  That amount up front is a lot!  And illegal in CA.  Ask to see their license, check the licensing board and then call the number the licensing board has for the business and see if you get the same guy.  My be someone using someone else's license or an unlicensed person.  Anyone with a license knows the how much down rule.

@Adrian Hollifield, While most HML's who escrow funds follow a similar path, every lender will have subtle differences.

Here's a couple of examples..., 

1. it is common to be limited to 3 draws. However, some of us don't have that limit. I don't have a limit to the number of draws. My limit is dollar based. I ask that no draw be for less than $3,000 (I may increase this based on the amount of the rehab budget). The reason I do that is to help with cash flow. In my market, the prices of houses here is considerably lower than where you are in CA. You may be required to draw more funds at a time than I require.

2. Some lenders will only allow you to make the draw when 100% of the scheduled work, per the scope of work for that draw) is 100% complete. If you attempt to make a draw and even 1 item on the list isn't complete, the draw is denied. This is an extreme example, but it exists. Not every lender will allow you to make partial draws.

The point of the examples is to show you that some lenders are rigid and some are more flexible. Unfortunately, the correct answer to your question can only come from the lender you choose to work with.

Good luck!

@Adrian Hollifield . Well think of it from the lenders perspective. You just going to give someone all the money and just take their word for it that they won’t blow it on something else?

@Jeff Cichocki it seems that id need to find a lender that doesn’t make me wait until the work is completely done to dispense everything. I feel it would be challenging and maybe impossible to find a contractor that would be willing to wait that long to get the money. I’d have to front the money myself to keep the contractor

Thanks for the response!

@Adrian Hollifield most I have dealt with will give money in stages like a bank loan on a house big or major rehab i.e. sheetrock done $10k, paint done $5k, cabinets in $15k, etc sp you don't need to front it all, but you need to front the deposit and some progress payments if the lender is slow on releasing payments. Just be honest with your contractor and give them the details and they'll probably work with you on it

@Adrian Hollifield , What @Odie Ayaga said. You don't need to finish everything in the house in order to get reimbursed. Assuming a 3 draw schedule scenario, have your contractor break his bid into 3 parts. When he completes each part, the funds are released.

When I'm lending here in Wisconsin, I don't put a traditional draw schedule in place for my borrowers. My schedule is more dollar driven. I ask that they not ask for less than $3,000 at a time. However, to be clear, just because you bought the water heater, doesn't mean you're going to get reimbursed for it right away. It has to be installed (completed) to be paid. If a lender is going to fund something for 123 main street, the funds and work needs to be for 123 main street. 

The reason that lenders look for completed work is because all too often things like water heaters, furnaces, AC units, appliances, etc, are bought and brought on site only to disappear to another project later. If they are installed, they are more difficult to move. Lenders don't appreciate borrowers who rob funds from one project to pay for another unrelated project. Robbing Peter to pay Paul will always end up getting you blacklisted by the lender.

Good luck!

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