The Most Important Elements of a Construction Contract,

for construction loans 

   Construction loans are a little more paperwork intensive than purchase money loans. Every construction loans has a part known as the builder’s package.

A Builder’s package includes items such as; a builder’s statement or resume which includes things like previous experience references and credit and banking references, a line item cost breakdown, a materials list and last but not least a construction contract. 

   Guidelines for construction loans require a borrower to enter into a written contract with a builder/contractor.  The following is a list of items that every good contract should have.

A line item cost breakdown is an integral part of a construction contract and such it should be referred to at all times. It is common for a homeowner to change some specification or other and it is highly recommended that a firm change order be written in these cases.

   A Construction contract is a written agreement between the borrower and the builder for services to be provided by the builder for a stated consideration.

   A properly written and customary contract contains*:

·  A clear statement outlining the responsibilities each party will perform.

·  The date of the contract, the scheduled dates for commencement and completion of construction of the project .  An event date, rather than the actual date, is sometimes acceptable.

·  The amount of payment the builder is to receive for each stage of construction, as well as under what conditions it will be received, such as passing inspection etc...  If the property is located in a state that charges sales tax, the contract must specify whether the amount includes state sales tax.

·  Proper reference to a completed and signed Line item cost breakdown and list of materials..

·  A payment method that is compatible with the line item cost breakdown and the disbursement procedures of the investor.

·  Provisions for possible changes to plans or specifications by appropriate change orders. Since most construction loans have a contingency provision a cost over run may be paid for using that provision. 

·  Full identification of all parties and definition of all names used in the contract (contractor, owner, subcontractors and architect).

·  Architect's responsibility, if any.

·  Signatures of the borrower and contractor.

·  The property's numerical street address or full legal description.

Note that construction loans are reimbursement loans. See the full FAQ pages for information on how the distribution is made. 

ConstructionLoansFAQ and/or it's owners and operators do not provide legal advice. We strongly recommend you reviewing all legal documents with your attorney.

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