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Posted by Matt Barrow on September 16, 2007, 6:25 pm
>I am a homeowner planning a major home renovation project and after
> talking with several contractors I have settled on one that I trust
> and who checks out in terms of customer references, history of similar
> work, supplier checks, etc. Due to cost of construction, I'm stuck
> with a custom construction loan which has some nice features for me
> (one closing, interest only payments during construction, an
> attractive fixed interest rate after completion, etc), but (surprise!)
> my contractor is having trouble with a couple of their policies.
> First, the lender wants to perform an initial and a couple of progress
> credit checks on the contractor's personal finances. They say that
> this is to insure that funds are not being diverted from the project
> to his personal accounts.
That one sounds bogus. It sounds like whomever you've gotten your loan from
is particularly naive about this type of lending.
> The contractor says that he has nothing to
> hide, but that his personal business is just that, and that it is only
> reasonable for the lender to perform credit inspection on his fully
> formed corporation but not his personal finances. He is protective of
> his personal credit history and score.
> Second, the lender will not allow draws on the loan prior to
> completion of work. This means that there does not appear to be a
> mechanism for the contractor to access funds prior to construction for
> ordering materials or pre-paying his subs. He says 50% is typical to
> mobilize them and lock them in for the project.
You should have a clause about procuring materials and "completion of work"
payments.
> Who is being reasonable on these issues? Is the lender following
> common practice?
No.
> Are there any contractors out there who have run
> into these missues, and if so did you walk away from the project or
> were you able to work through them?
I'd seek out a different lender. Either they're clueless, or they are trying
to play games.
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> talking with several contractors I have settled on one that I trust
> and who checks out in terms of customer references, history of similar
> work, supplier checks, etc. Due to cost of construction, I'm stuck
> with a custom construction loan which has some nice features for me
> (one closing, interest only payments during construction, an
> attractive fixed interest rate after completion, etc), but (surprise!)
> my contractor is having trouble with a couple of their policies.
> First, the lender wants to perform an initial and a couple of progress
> credit checks on the contractor's personal finances. They say that
> this is to insure that funds are not being diverted from the project
> to his personal accounts.