Build Information

Starting Construction Work Early: What is Allowed?

The "No Work" Rule in Construction Lending

One of the most critical rules in construction lending is the prohibition of starting work on the property before the loan has officially closed and the lender's mortgage has been recorded. This is primarily a legal issue concerning "mechanic's liens." If a builder or subcontractor starts work and isn't paid, they can file a lien against the property that could potentially take priority over the bank's mortgage. To avoid this risk, lenders strictly enforce a "no-work" policy until the closing is finalized.

What Counts as "Work"?

The definition of work is quite broad. It includes anything that physically alters the property. Clearing trees, grading the land, installing a construction fence, or even bringing a portable toilet onto the site can all be considered a "start of construction" by the title company. Even the presence of building materials like lumber or rebar on the lot can trigger a violation of this rule.

The Consequences of an Early Start

If work has started before the loan closes, it can create a major roadblock. The title company may refuse to provide the necessary insurance to the lender, or they may require an expensive and time-consuming "broken priority" process. In some cases, the lender may even decline the loan entirely if they feel their legal position is compromised. This can lead to significant delays and added costs.

Exceptions and Pre-Closing Preparation

While physical work on the site is prohibited, there is a lot of preparation that can and should happen before closing. You can complete your architectural plans, finalize your contract with the builder, and even apply for your building permits. The key is to ensure that no physical activity happens on the property until the title company and the lender give the official green light after closing.

Conclusion

The "no work" rule is one of the most important things to communicate to your builder early in the process. By respecting this boundary, you ensure a smooth closing and protect the legal integrity of your project. If you have questions about whether a specific activity is allowed, always check with your lender first. Contact me today to learn more about the construction closing process.

The "No Work" Rule in Construction Lending

One of the most critical rules in construction lending is the prohibition of starting work on the property before the loan has officially closed and the lender's mortgage has been recorded. This is primarily a legal issue concerning "mechanic's liens." If a builder or subcontractor starts work and isn't paid, they can file a lien against the property that could potentially take priority over the bank's mortgage. To avoid this risk, lenders strictly enforce a "no-work" policy until the closing is finalized.

Breaking this rule can lead to your loan being denied at the very last minute, even if you are already approved. However, there are certain non-invasive activities that are allowed before closing. Understanding the line between "preparation" and "construction" is essential.

What IS Acceptable Before Closing

Lenders generally allow activities that do not involve "breaking ground" or delivering permanent materials to the site. These include:

• Surveys and Staking: Having a surveyor mark the property lines and the footprint of the future home is perfectly acceptable.
• Soil Testing and Engineering: Conducting perc tests, soil borings, or having an engineer review the site for foundation requirements is allowed and encouraged.
• Building Permits and Applications: You can and should submit your plans to the city or county for permit approval before closing.
• Site Visits: Architects, builders, and appraisers can visit the site to finalize plans and valuations.

What IS NOT Acceptable Before Closing

Any activity that fundamentally changes the state of the land or involves the delivery of construction materials is strictly prohibited. This includes:

• Clearing Brush and Moving Dirt: Do not bring in a bulldozer to clear trees or level the building pad.
• Setting Form Boards: Even if no concrete is poured, setting the wooden forms for the foundation is considered starting construction.
• Rough-in Plumbing: Any underground utility work or plumbing installation is a major violation.
• Pouring the Foundation: This is the most obvious violation and will almost certainly result in a loan denial.
• Delivery of Materials: Do not have lumber, pipes, or any other building materials delivered to the site before closing.

The "Broken Priority" Risk

If work has started, it creates what title companies call "broken priority." This means the lender's mortgage may not be the first lien on the property. Fixing this often requires expensive "indemnity" agreements or even stopping work for a specific period to reset the legal clock. It is far better to simply wait until the loan is closed before starting any physical work on the land.

Conclusion

While it's tempting to get a head start on your dream home, the risks of starting construction early far outweigh the benefits. Stick to the "pre-construction" activities like surveying and permitting, and wait for the green light from your lender before moving any dirt. If you have any doubt about whether a specific activity is allowed, always ask me first. Contact me today to ensure your project starts on the right foot.