How the Contractor Gets Paid

The time to think about the process of paying the contractor is when you are developing the Work Write-up. If possible, your contractor and the Plan Consultant, as they develop the cost and scope of the project, should discuss the number of inspections and draws needed.

The renovation program drives the number of draws. The following chart provides guidance as to the maximum number of draws per program.

Loan Type

Standard (Full)

Limited (Streamline)

FHA

An inspection of completed work is required before funds released

Maximum of five (5) draws.  The number of draws is set by the Plan Consultant.  There is a 10% hold back for each draw

Two draws – 50% released at closing remainder upon final inspection

HomeStyle

An inspection of completed work is required before funds released

Maximum of five (5) draws.  The number of draws is set by the Plan Consultant.  There is a 10% hold back for each draw

 

Further, part of the Work Write-up process is deciding on how long the project will take. Although the Plan Consultant sets the project timing, you and your contractor will have a great deal of say in deciding the time frame. The time frame and the number of draws will often influence the order in which work is completed. For example, the Plan Consultant and your Contractor might decide to complete a discrete part of the job first, like roof repairs. By completing a part of the project that does not depend on other work being completed, a separate draw can be requested, and thus begin the flow of the funds to the contractor.

Keep in mind that, for all but the FHA Limited (streamline) loan, there is no money up front. The contractor must be able to carry the initial cost of labor and materials until the draw process begins.

The draw process is as follows: the contractor or homeowner will contact the lender’s draw process department to request a draw. The lender then orders an inspection, usually using the Plan Consultant. The Consultant will schedule, with the homeowner and the contractor, a date to meet at the property so the Plan Consultant can inspect the work for which the draw is being requested. If the work is completed to the level of satisfaction of the Plan Consultant as well as the homeowner, then the Plan Consultant will complete a draw request form. The draw request form must be signed by the owner, Plan Consultant, and the contractor. The lender then processes that request, and if approved, the funds are released to the homeowner. Those checks are in the name of the owner as well as the contractor. Further, there is a 10% holdback from each draw. The holdback amount is as part of the final draw.

Note that a streamline FHA 203(k) loan provides for a release of funds at the closing. As a general description, the amount released is 50% of the labor and materials.

The draws process does not need to be complicated, so long as everyone understands the flow of that process.