A project is 60% complete, but 85% of the construction budget has already been advanced. What should the lender review before approving another draw?
Correct Answer
D) Completed work, remaining budget, lien exposure, and the loan's draw conditions
Why this is correct: In construction lending, the disbursement of funds should closely track the percentage of work completed. A scenario where 85% of the budget is spent but only 60% of the work is done signals significant risk of cost overruns, potential abandonment, or misuse of funds. Before approving another draw, the lender must conduct a thorough review to protect its investment. This includes verifying the actual completed work, analyzing the remaining budget to see if it's sufficient to finish, assessing lien exposure (have contractors been paid?), and strictly adhering to the loan's specific draw conditions and inspections. Why the other choices are wrong: Only the borrower's original credit score is irrelevant to the current construction progress and budget management. Only the permanent interest rate is a future financing term, not a factor in the immediate draw decision. Whether the builder prefers an early payment is not a prudent lending standard; the decision must be based on objective loan conditions and verification, not preference. Exam tip: In construction loans, watch for mismatches between "percent complete" and "percent paid." This is a major red flag requiring immediate, detailed review before any further disbursement.
Why This Is the Correct Answer
Why this is correct: In construction lending, the disbursement of funds should closely track the percentage of work completed. A scenario where 85% of the budget is spent but only 60% of the work is done signals significant risk of cost overruns, potential abandonment, or misuse of funds. Before approving another draw, the lender must conduct a thorough review to protect its investment. This includes verifying the actual completed work, analyzing the remaining budget to see if it's sufficient to finish, assessing lien exposure (have contractors been paid?), and strictly adhering to the loan's specific draw conditions and inspections. Why the other choices are wrong: Only the borrower's original credit score is irrelevant to the current construction progress and budget management. Only the permanent interest rate is a future financing term, not a factor in the immediate draw decision. Whether the builder prefers an early payment is not a prudent lending standard; the decision must be based on objective loan conditions and verification, not preference. Exam tip: In construction loans, watch for mismatches between "percent complete" and "percent paid." This is a major red flag requiring immediate, detailed review before any further disbursement.
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