The Importance of Lien Waiver and Affidavit Requirements as Part of the Construction Loan Request Draw Process

Often times, during the construction phase of a church project, many questions arise pertaining to the “construction loan draw process.”  With understanding how a construction loan draw works, it’s important to first understand why the lender must follow the procedures and policies of the title company.  In efforts of mitigating inherent risk of financial loss, the lender (DevCo) will require the issuance of a “Lender’s Policy of Title Insurance” as part of the loan closing process.  The nature of the title policy can sometimes be a bit confusing. In addition, church project members should not seek shortcuts when submitting construction loan request draws. When shortcuts occur, it can put the church and lender into a compromised position for potential financial loss.  At the time of closing, the title company will issue a lender’s policy for the total amount of the loan; however, the coverage will always equal the cumulative amount of loan principal disbursed.

Anytime you’re working with a construction loan that requires mechanic’s lien coverage (which is generally anytime there is a big project underway, and always when there is actual construction), the title company will require that partial lien waivers and affidavits be required at each draw.  When a draw is requested, a title update must be completed to confirm that there are no mechanics liens on record.  The partial lien waiver is signed by the contractor or subcontractor and basically tells the title company that it has been paid through a certain date and waives its right to file a lien for that work.  The Interim Affidavit is needed as it is signed by the General Contractor and tells the title company that everyone who has completed work on the property up to that date has been paid and that there have been no claims made to the General Contractor and no suits brought against it in connection with the work done on the property.  This allows the title company, after confirmation that the title update is clear, to issue a title endorsement increasing the coverage under the title policy to the total loan amount outstanding after each draw.  That in turn gives the lender title coverage for the total amount of the funds that it has disbursed.  Once the construction is completed the contractor will sign a final lien waiver which indicates that all amounts owed for the work have been paid and a final affidavit will be signed by the general contractor to confirm that all parties on the job have been paid and no claims have been made.

These forms are really more for the protection of the title company and the lender; however, they do protect the church in that they confirm that the contractors are being paid (and acknowledging payment) and are waiving lien rights up to that point so the church can feel confident that there won’t be any unexpected mechanic’s lien filed.

Our DevCo lending experts recognize that construction lending can be time-consuming and challenging.  However, we are available to guide church project team members through these construction loan procedures.   At the end of the project, the church will be rewarded with a beautiful edifice based on its initial desire to continue the building and uplift of God’s Kingdom!

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