Are you planning to build your dream home or start a new construction project? A construction loan disbursement agreement is an essential document in the construction loan process. It outlines the terms of how and when loan funds will be disbursed to finance the construction project.

Construction loans are a type of financing used to fund the construction or renovation of a property. Unlike traditional mortgages, construction loans disburse funds in increments as the construction progresses. Each disbursement is made based on the completion of specific stages of construction, referred to as “draws.”

A construction loan disbursement agreement is a contract between the borrower and the lender that lays out the details of how the loan funds will be disbursed. It typically includes information such as the total loan amount, the dates and amounts of each draw, and the conditions that must be met to receive each disbursement.

The disbursement agreement will also specify who is responsible for overseeing the construction project and ensuring that the work is completed according to the plans and specifications. This person is typically referred to as the “inspector” and is responsible for verifying that each stage of construction is complete before the loan funds are released.

The disbursement agreement may also include provisions for change orders. Change orders are requests for modifications to the original plans that can impact the total cost of the project. In some cases, the lender may require that change orders are approved before any additional funds are disbursed.

One of the most crucial aspects of a construction loan disbursement agreement is the interest rate. Since construction loans are typically short-term loans, the interest rates are generally higher than traditional mortgages. The disbursement agreement will outline the interest rate for the loan and how it will be calculated.

In conclusion, a construction loan disbursement agreement is a crucial document in the construction loan process. It outlines the terms of how and when loan funds will be disbursed to finance the construction project and ensures that the work is completed according to the plans and specifications. As a borrower, it is essential to read and understand the agreement before signing to avoid any misunderstandings or disputes with the lender.