When you're using a 203(k) or a FannieMae HomeStyle loan, your contractor is paid through a draw schedule. A draw schedule establishes that once "x" work is complete, the contractor can be paid for it. The HUD Consultant is responsible for creating and implementing the draw schedule.
Typically there are 5 draws, but it can vary depending on if you are doing a smaller renovation. Before the loan is closed, the contractor and HUD Consultant will determine the amount of work that will need to be completed before each draw can take place.
After the loan closes, and the renovation begins, the contractor begins purchasing materials, bringing materials on site, and even installing materials. After a set amount of work is done, it's time for the first draw. Typically, the first draw requires the most out of pocket expense from the contractor before being paid. There is something called a supply draw that can help your contractor fund materials that have already been ordered.
Before the contractor is paid through each draw, the HUD Consultant comes out to the property to verify that the appropriate work was completed to warrant the contractor for taking the draw. Again, before the work even starts the draw schedule is laid out in such a manner that the contractor understands what work has to be done before taking each draw.
This cycle will continue to take place from draw 2-4. A certain amount of work will be completed, the contractor will contact the HUD consultant, another draw is released.
The last draw will take place once all the work has been completed. This is the HUD consultants last walk through to make sure that everything has been done to code and in a workmanlike manner. Before this last draw is released you will also have to have clear and free title from any liens that may have been placed on the property during construction.
As you can see, understanding the draw schedule and having a contractor that is financially solvent are two critical components to the success of an FHA 203(k) or a FannieMae HomeStyle loan.