A construction loan provides the financing to build or complete a house, structure, project, development or other improvements to land. In most instances, construction loan provides the financing to build or complete a house, structure, project, development or other improvements to land. In most instances, construction loan proceeds are disbursed in successive draws and such draws are usually staggered throughout the process of constructing the improvements. It is customary in most markets for the lender to control the draws, and to require lien waivers from laborers or suppliers when they are paid. The lender has the duty to monitor the project to ensure that the level of completion of the improvements is commensurate with the amount of construction funds disbursed. In certain markets, title companies, escrow companies, or attorneys may disburse construction loan funds using similar disbursements/ payment/waiver procedures. It is the title agent’s responsibility to reduce the underwriter’s exposure to mechanics’ and materialmen’s liens. Therefore, it is necessary for the agent to be familiar with relevant state laws as they relate to mechanics’ liens and their potential for priority over an insured mortgage.
In some jurisdictions, please be aware that insuring against unfiled mechanics’ liens during construction or within the lien-filing period after construction is considered to be unusual and high-risk underwriting. Any Agents National Title agent must obtain specific, written approval from the company’s local underwriting counsel before providing such coverage or disbursing a construction loan. Recording a construction loan mortgage or deed of trust prior to the commencement of construction or the delivery of materials to be used in construction is adequate to establish the priority of the lien of such mortgage in some states. However, the unique requirements of a state’s statutory framework along with case law developments require that title agents be knowledgeable about the mechanics’ lien specifics of their area.
It is acceptable, when insuring a construction loan, to issue the standard ALTA Loan Policy provided Schedule B, Part 1 contains a pending disbursements clause which limits liability to the amount actually disbursed up to the face amount of the policy as shown on Schedule A.
Prior to the release of each draw, the lender may want an endorsement bringing the title to date and insuring that there are no intervening mechanics’ or materialmen’s liens or other matters outstanding which could adversely affect the lien priority of the mortgage.