You’ve undertaken a new construction project, residential or commercial, and engaged a builder and lender to help execute it. But how and when does the builder get paid?  How are you sure the project is progressing on track?

To ensure the project is completed on time and on budget, a builder will send loan draw requests for labor and materials according to a loan draw schedule. The lender then disburses funds based on those draw requests and on confirmation of construction progress. But how does the lender confirm the progress?

Lenders rely on a loan draw inspection to determine new construction progress in order for funds to be released. Loan draw inspections help to mitigate risks inherent to construction projects through regular on-site inspections with experienced loan draw inspectors who become the eyes and ears of the lender on the job site.

What is a loan Draw Inspection?

In a loan draw inspection, the lender hires a home inspector to visit the construction site and assess progress. The home inspector is looking to show where the project is in relation to the timeline that was set out, checking the accuracy compared to the original loan draw request, and reviewing the budget. 

A construction lending best practice used by most lenders is ordering a loan draw inspection to validate progress in conjunction with disbursing funds.  The simplest reason for a loan draw inspection is to follow along with the builder so that both the project owner and the lender can ensure the loan proceeds are going into the collateral on the loan, and to identify progress concerns as early as possible.

Why is a loan Draw Inspection Important?

A loan draw inspection is important for a number of reasons, but essentially it ensures that all money on a new construction loan is accounted for.

• It lets the lender know where the project is compared to the timeline they were given. Most risk mitigation companies insist on funds being given out based on the results of these draw inspections because they want to ensure that there’s no more money tied up than is necessary for the project.
• Loan draw inspections can also help track funds because the home inspector has to account for every cost request and compare it to the on-site representation.
• Inspections are also important to the builder in that they ensure they are receiving payment for work completed so that they have the funds to continue on to the next phase of construction.
• Above all else, inspections are important for the project owner, to aid in the smooth and timely completion of the project.