Construction financing is complex. Coventry Enterprises LLC helps clients understand draw schedules, interest reserves, builder risk, and underwriting before the first shovel hits the ground.
Construction loans don't disburse all funds at closing. Instead, money is released in stages as the project progresses through defined construction milestones. This structure protects the lender by ensuring funds are only released against completed work. For borrowers, it means understanding the draw schedule before construction begins is critical to project cash flow planning.
A typical draw schedule divides the loan into 4 to 7 draws corresponding to construction phases: foundation, framing, rough-in (electrical, plumbing, HVAC), drywall and interior, exterior completion, and final inspection. Each draw requires an inspection by a lender-approved inspector who verifies the work is complete before funds are released. The inspection process adds time between completing a phase and receiving the next disbursement.
Coventry Enterprises LLC reviews draw schedules against project budgets and timelines to identify gaps where the borrower may run short of cash between draws. Particularly on custom projects where material costs or labor costs exceed estimates, understanding where the draw boundaries fall is essential to managing the project without stoppages.
An interest reserve is a portion of the construction loan budget set aside to make interest payments during the construction period. During construction, borrowers typically pay interest only on the amount drawn, not the full loan commitment. The interest reserve covers these payments automatically, so the borrower doesn't need to make out-of-pocket interest payments while the project is under construction.
The size of the interest reserve depends on the loan amount, the expected draw pace, the interest rate, and the projected construction timeline. If the project takes longer than expected, the interest reserve can be exhausted before construction completes, forcing the borrower to make interest payments from other funds or seek a modification. An undersized interest reserve is one of the most common construction loan problems Coventry Enterprises LLC identifies in document reviews.
Calculating an adequate interest reserve requires projecting draws on a monthly basis over the full construction timeline, applying the interest rate to the average outstanding balance, and adding a buffer for timeline delays. Jack Bodenstein and Coventry Enterprises LLC perform this calculation for every construction loan review to verify the reserve is sufficient.
Lenders extending construction loans have strong opinions about who builds the project. Most require the general contractor to be licensed, insured, and in some cases approved by the lender. The lender's approval process for contractors can take time and may require the contractor to submit financials, references, and proof of insurance before construction can begin.
Builder risk insurance is separate from homeowner's insurance and covers the project during construction against fire, theft, vandalism, and other perils. It's required by virtually every construction lender and must be in place before the first draw can be requested. Some borrowers who are owner-builders or who are working with small contractors discover late in the process that their contractor doesn't meet lender requirements, which can delay or derail the project.
Coventry Enterprises LLC reviews contractor requirements in the loan documents before a borrower commits to working with a specific contractor, avoiding the problem of discovering a mismatch late in the process.
Construction loan underwriting evaluates both the borrower and the project. On the borrower side, lenders review credit history, income, existing debt obligations, and liquid reserves. Reserves requirements for construction loans are typically higher than for purchase mortgages because construction projects routinely encounter cost overruns, and lenders want evidence the borrower can absorb unexpected expenses without the project stalling.
On the project side, lenders evaluate the plans and specifications, the cost-to-complete budget, the estimated completed value (based on an appraisal of the finished project), and the loan-to-completed-value ratio. For most construction loans, the LTV is based on the lower of cost or completed value, which means a project where construction costs are high relative to the finished value may face LTV constraints that reduce the available loan amount.
Understanding how the lender will underwrite the project before submitting a loan application helps Coventry Enterprises LLC clients position their projects more effectively and anticipate conditions or requirements that might otherwise surface as surprises during underwriting.
Construction loans fail or become problematic in predictable ways. The most common issue is an undersized interest reserve that runs out before the project completes, forcing the borrower to make out-of-pocket payments or seek a loan modification at a vulnerable point in the project.
Budget underestimation is the next most common problem. Construction costs routinely run 10% to 20% over initial estimates, and a budget with no contingency reserve has no room to absorb those overruns. When a contingency is included but sized inadequately, borrowers may find themselves paying out of pocket or stopping work while they scramble for additional funds.
Timeline extension is another recurring issue. Most construction loans are structured for 12 to 18 months. Custom projects, challenging sites, or contractor issues can push projects to 24 months or beyond. Loan extensions cost money in modification fees and continued interest. Borrowers who don't plan for the possibility of timeline extensions get caught off guard when extensions are needed.