Many custom homeowners think that, once they are granted a construction loan, they just have access to the funds as they please, but this belief cannot be farther from the truth as there are two ways in which a bank offers the lent money- the voucher system and the draw system, respectively. For decades, the former has prevailed but then it has been objected that it requires too much paperwork and people chasing. Consequently, some lenders are shifting to the latter in order to simplify the procedures. However, the article intends to explain how the voucher system works since it is still widely used.
Although some have claimed that the draw system is more lenient than the voucher one, there are still many lending financial institutions which prefer the “more intricate” way. Usually employed by banks that are looking to keep tight control on their funds during the custom house building process, the voucher system is more appropriate and efficient to make sure that all parties have met their obligations along the way.
The starting point of the voucher system resides in the custom homeowner’s cost breakdown, which clearly divides and associates the various stages of the building project with specific costs for labor and materials. The lender issues a voucher, which looks like an oversized check on the front side of which are written:
- the date;
- the amount that the bank will pay;
- the receiver of the amount;
- a description of exactly what work or materials the voucher should cover.
On the back of the voucher, there is a place where your contractor or supplier has to enter pertinent business information like their address and Employer Identification Number. These data are used by the issuing bank to report all money that it has paid for tax purposes. What a borrower can also find on the verso of the voucher is a paragraph stating any rights that the supplier or sub may have to put a lien on the property.
In the capacity of custom house project owner, you receive this voucher that you in your turn have to give to your suppliers and contractors to fill out the necessary information. They also have the responsibility to provide the original invoices and bids to the bank, when requested. Once the bank inspector verifies whether the work has been completed, the suppliers or subs are directly paid the amount requested on the voucher by cashier’s check.
The Benefits of the Voucher System
Within the custom house industry, there is the almost unanimous consensus according to which the rigid voucher system ensures the most accountability. However, despite this favorable premise, there are still parties who find it as a cumbersome factor in the increasingly fast-paced and flexible building process. It might be complicated and tangled in terms of procedure, but it surely has some benefits as well. Let us have a look at them.
- The voucher system gives the custom homeowner added control to make sure the money is used for the right purpose when the contractor isn’t financially strong;
- It helps the project owner and the bank protect themselves against mechanic liens;
- It ensures a tight budget control exerted by a third party (the bank) – thus, arguments over money between you and your contractor are kept to a minimum because every decision has to meet the bank’s approval.
On the other hand, the voucher system has also its drawbacks. The most relevant are:
- It requires a lot of paperwork, which can be a true hassle;
- It leaves little room for wide variations from the budget, requiring strict adherence to it;
- It requires multiple signatures from multiple parties, which is surely time-consuming and problematic if these parties travel a lot.
Some banks simply impose you to use this system, whereas others give you the liberty to choose from the voucher system and the draw system, but, no matter the case, the lender is always focused on efficiency and safeguarding his investment.