Can I start construction before I close?

Yes you can, but it can complicate things if not done correctly. At times clients will want to start their project before the loan has closed. Items to consider are:

Permits: Permits are not required to close but are required at the first draw. Be very sure those are available by that time otherwise there will be a delay in processing the draw payouts until received.

Approval: Until you have an unconditional loan approval, there is a chance your loan may not be fully approved and able to close. While a good loan officer can give great guidance on any possible issues, the reality is there are items that can pop up unexpectedly that could derail the loan and closing. If you are anxious to get going I would recommend waiting until at least the appraisal is back as that can have a huge impact on the loan as well as provide you a conditional loan approval.

Costs Paid Prior to Closing: If there are any costs paid in connection with the project, be sure to document it with paid receipts, lien waivers, and copies of your check(s). A deposit to a builder would be common in these situations. It is not recommended paying any sub-contractors directly. If you do, make sure to get the same documentation. If you provide your builder with deposit funds and want to be reimbursed once the loan closes, this documentation will need to be provided to the title company and to the lender.

“Pre-Starts”: A “pre-start” is generally when a lender is coming into finance a project that has already started and is in process. People have been paid and work has been completed. It can be very messy to get started with a construction loan at this point. The difficult part can be documenting who has been paid, who has done what work, and if they have provided a lien waiver. During the normal course of a construction loan, a contractor or sub-contractor will get paid through the title company and they will provide a “lien waiver” stating they have been paid. That reduces the chance they will show up down the road and claim they are owed more funds. When a construction project does not run through a title company, that paperwork is generally not collected which means there can be a lot of catch up paperwork that will need to be collected. The bottom line is to obtain a construction loan if you think you may need/want one before you start any construction work.

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