This is a question we are asked every day! Why do I need to worry about the fund control process? My borrower can qualify and we have a bid to build the home so we can send the LO to inspect the property.
If this sounds like something you hear or say, lets discuss how things go from bad to worse in a minute. When your borrower brings the builder to the process, what does the lender do to validate that person can complete the project? What do past clients and suppliers say about the contractor? Maybe it’s a small rehab, no issue with a handy man with no insurance or license. You approved the project and contractor during the process, and the borrower goes after the lender.
What about that bid your underwriting department used to approve that loan? Do they use a costing program, and do they have an estimating background to both underwrite a construction project as well as the credit risk of the borrower? Most contractors bid competitively; what if they are missing items and “think” it will be a change order after the fact since I’ll be well into the project?! Where is that money coming from? Does the borrower have substantial reserves? If not, the contractor walks and now you have a new problem: no contractor, and replacing a contractor on a project that is under-funded! Sounds like an REO, or maybe a scratch-and-dent busted construction project. How are those priced?
After funding comes the fun part: managing the funds and change orders, collecting lien releases, performing draw inspections and determining percent-complete for disbursement, discussing findings with contractor and borrower about “why”! What about moving line items around? The 24″ x 24″ travertine and granite counters you expected to put in are now sheet vinyl and laminate! What just happened to your value and LTV? Did your funders catch that or just disburse the funds because it “still balanced”?
Those pesky draw inspections! Why do I need them? “I can send you photos and you can wire me the funds.” Trust but validate! Does your post-closing team understand the construction “lingo” to be able to talk about what they are seeing and understand a draw recommendation? What about following up on the lien releases from the subs? Conditional/unconditional, multi-state originator, title date downs, validating lien releases to the contractor disbursement report… Did they miss one or many? How do I discuss this with the contractor and borrower, and what if I have to take over the process from the contractor?
Are we prepared to take on this risk? One loan, 100 loans, FTE’s, volume fluctuations, lay-offs, sales vs. ops, retail, wholesale, warehouse lenders… everyone has a risk tolerance; What is yours? Let CFSI show you how we work and how you can originate these profitable loans.