We are often asked by homeowners, whether paying cash or using a bank, about how the process works. Here is some information you may find useful.
If a bank is being used, they will coordinate a group of items which provide protection for both the bank and the homeowner. They will start with title insurance for at least the value of the mortgage. The title insurance provides protection for the bank and/or homeowner from several possible situations. The first of which is an issue with the prior title which may impact the actual ownership of the property. All improvements to a property belong to the owner of the property. So it is possible that a new home is completed and paid for by a homeowner only to find that their title was clouded at some point in the past. Title insurance provides protection against this. It is important to understand that title insurance like most other insurance has a maximum payout value. If you acquired title insurance in the value of the lot at the real property closing (as is common), it will not cover the cost of improvements without a change to the policy. A bank will also use the title insurance company to check the title at each draw request to make sure there is no construction liens filed and to note any sub that has filed a notice to owner. This provides protection to the bank and homeowner from construction liens they may not be aware of.
The bank will also hire an independent person to inspect the home with each draw request to confirm the amount of work being billed has been completed. This inspector is not really employed to determine quality (although if poor, they will probably note it) but they do provide assurance to the bank and homeowner the quantity of work being billed has been completed.
Notice to Owners is the way a Florida subcontractor or material supplier protects themselves from not being paid by the main contractor. In some cases these subs or suppliers may not be directly employed by the main contractor and are actually employed by a sub contractor. Either way, the notice is a legal document that a bank or homeowner needs to pay attention to. In most situations (AIA contracts excluded) the contractor will provide release of liens from all subs or suppliers when they request a construction draw. These will be both partial during construction and finals at the end. These provide the bank or homeowner with assurance that the payment of the sub is current with the draw request. AIA documents usually give the builder a certain number of days after receipt of payment to provide the release of liens. In the event a contractor doesn’t pay a sub or supplier the amount due, the vendor can lien the house. While this lien is behind the main mortgage, it does affect title for a certain period. If the general contractor does not believe the vendor is due the money, they can bond the lien off by depositing funds with the county until the courts make a ruling. At the end of construction, final releases should be provided for all subs or suppliers who have filed a notice to owner. A final affidavit from the main contractor should be provided as well. This notarized document provides a cut-off date for valid notice to owners to be filed. Unless a vendor is listed with the amount due, a bank or homeowner can rely on this form and make final payment with the understanding a notice to owner cannot be filed afterward.
While a bank coordinates the above items, it doesn’t come without fees. The bank will charge the homeowner for the value of the title insurance, inspection fees, and typically a processing fee in addition to several smaller fees. It is possible for homeowners to work directly with an attorney or title insurance company to do the same work a bank would through its title company to confirm the title remains clean throughout the construction process. This leaves the 3rd party inspector as an open item. In some cases the contractor can provide photos that will show the work adequately for the homeowner to make payment. In other cases where the homeowner wants more assurances, there are numerous small contractors and home inspectors who will fill this void. Since this would be a separate contract that the homeowner would enter into, the responsibilities can be discussed and added to. If quality is a concern, the inspector can be asked to make a visual review of the work performed and also to do a final walk through. A bank will not normally require this of its inspectors.
To summarize, there are ways for a homeowner to provide themselves with the protections offered by a bank without using the bank. At Divco Custom Homes we can make references for title companies, attorneys and home inspectors you may need to make the process more secure.