This is not a good idea. Historically, most construction lenders won’t touch a deal that has pre-started. Possible mechanics liens create title insurance problems. Best case, and at a minimum, the title company and lender would want construction to stop for the mechanics lien window of 60 days, after filing certain notices. The title company would probably want to underwrite the borrower’s income and assets before issuing title insurance, and they’ll want indemnification agreements signed to cover themselves if there is loss of lien priority. Even if a title company can be found to issue title insurance at the time the construction loan is funded, most banks won’t do this scenario.
More so than in new construction, pre-starts happen in a rehab/addition situations, where the project cost are more than expected, and the borrowers begin seeking a construction loan when their funds are exhausted. They then may not have the liquid reserve requirements after close of escrow to meet program guidelines. We can now do these pre-starts on Construction Loan Program #4 if all funds are documented, requirements for liquid reserves after close of escrow can still be met, work has stopped long enough so mechanics liens are not a problem, and title insurance can be obtained. Still, not a good idea to pre-start.