By Brad Meyer, CEO and President, Trinity Real Estate Solutions
The English language offers nearly one million words for its use (988,968 to be exact), and surprisingly, few are used in exactly the same meaning or in similar contexts. Generally, every statement has precise significance, and we can apply this principle when a lender is working or “approving” specific builders.
In society, approval is a common word, which everyone is familiar. As a young adult, one applies for credit and is either approved or declined. When applying for college, a person is either accepted or rejected. When seeking employment, an individual is either hired or denied.
So, when a home builder completes a “builder application” for non-builder credit lines, naturally a lender would “approve” the builder, right?
When a lender “approves” a builder, it can create a hidden liability for that lender. Often, a borrower receives the unintended impression that he or she may rely on the lender for “approval” of the builder. However, if a construction project falters – for example, the builder walks off the job or misuses funds – the borrower often places
Consequently, we recommend lenders use a “builder registration” or “builder registration application” form (builders applying for a credit line complete different documents) when processing a construction loan. After a lender (or Trinity) researches and finalizes builder research, they can “register” the builder if said builder meets all of the required criteria. Moreover, just as draw inspections are for the lender’s use to confirm construction progress prior to funding, a builder registration form provides lenders detailed information and confirmation about a builder before allowing construction to start.
In conclusion, borrowers should conduct their own builder research before signing a construction contract. But completing a builder registration form adds that additional layer of confirmation for the lender, mitigating lender risk and ultimately, serving them and their bottom line well into the future.