[kmeade]

I have a question on construction loans concerning the undisbursed funds. If there is NOT a contractor involved (no formal contract) where do you show the undisbursed funds? In our area it is normal for the borrower to manage the workflow and pay each person as the work is completed. On a purchase transaction do you show the undisbursed in section K4 as “Construction Holdback to…”; non-purchase (alternative form) list the undisbursed under Payoffs and Payments as “Construction Holdback to…”; or do you show the undisbursed in the Cash to Close as “To Borrower”? Everything I have found references a contract where all the money is paid to the contractor.

[jholzknecht]

You mention that the borrower manages the workflow and pays each person as the work is completed. In order to pay each person the borrower must have control of the funds. If the funds are in an account under the control of the borrower the funds have been disbursed and should have been shown as cash to the borrower at closing.

[kmeade]

In this situation the borrower gets draws, from the construction loan, in phases (usually 3-4 phases). When the borrower requests a draw, an inspection of the property is performed. The percentage complete is compared to the amounts previously drawn. If the amounts are within the proper range additional funds are disbursed. We collect the inspection fees upfront.

[jholzknecht]

An unusual approach but it works for me. Actually in this scenario the lender still controls the workflow and the undisbursed funds would appear in the Cash to close section and in section K-4 on the CD.

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