Do Construction Loans Require a General Contractor? Everything You Need to Know

Outline

Do Construction Loans Require a General Contractor?

Construction loans are a unique breed in the financial world. Unlike traditional mortgages, these loans are disbursed in stages and tied directly to the progress of the construction. As such, general contractors (GCs) play a vital role in ensuring accountability, compliance, and quality throughout the process.

At Yieldi, a hard requirement is that a licensed general contractor must be in place for any construction loan to be approved. The only exception? When the borrower themselves is a licensed general contractor—a professional qualified and certified to manage the entire construction workflow.

This policy is not just a bureaucratic hurdle. It’s designed to protect everyone involved—from the lender to the homeowner, subcontractors, and even the local community.

Understanding Construction Loans

Construction loans fund the cost of building or renovating real estate. These are short-term loans, typically lasting 12–24 months, and are meant to be replaced with a traditional mortgage after the construction is complete.

Unlike regular loans that disburse a lump sum, construction loans are draw-based, meaning funds are released in increments tied to project milestones.

There are two primary types of construction loans:

• Construction-to-permanent loans: Convert to a traditional mortgage upon completion.
• Stand-alone construction loans: Require a separate mortgage once the project is complete.

The Role of a General Contractor

A general contractor is essentially the project CEO. They hire subcontractors, manage permits, oversee inspections, order materials, and ensure the project sticks to timeline and budget.

Without a GC, projects can go awry—fast. From permit delays to construction errors or subcontractor mismanagement, the risks pile up.

Why Do Lenders Require a General Contractor?

Lenders like Yieldi require a GC to mitigate risk. These professionals ensure:

• Proper documentation
• Reliable timelines
• Adherence to building codes
• Efficient use of disbursed funds

When a lender releases a $50,000 draw, they must know the framing, plumbing, or roofing tied to that amount will be professionally executed.

Yieldi’s Construction Loan Policy

Yieldi’s underwriting guidelines mandate the presence of a licensed general contractor on all construction loan applications.

The only exception is if the borrower holds an active GC license. In such cases, the borrower may be allowed to self-manage the project—subject to additional scrutiny and documentation.

This ensures a higher level of accountability and confidence for investors who fund the loan.

Exceptions to the Rule: Owner-Builders

While Yieldi is firm on its GC requirement, it acknowledges that some borrowers possess professional contracting experience. In such cases, documentation proving:

• Active GC license
• Recent similar project completions
• Insurance and bond coverage

…must be submitted before approval is granted.

Legal Requirements Across States

Some states mandate that only licensed general contractors can pull certain types of permits or manage commercial projects. Even in states without such requirements, insurance and legal liability concerns still make it advisable to have a GC on board.

Permits and Project Accountability

Permitting processes vary widely. GCs are familiar with local regulations and avoid costly permit rejections. Plus, they’re responsible for coordinating:

• Building inspections
• Fire code clearances
• Environmental regulations

Without a GC, these responsibilities fall to the borrower—adding stress and legal exposure.

Cost Overruns Without a General Contractor

Owner-build projects often underestimate costs. A licensed GC offers more accurate bids, accounting for labor, material delays, weather setbacks, and subcontractor availability.

Managing Risk: The Lender’s View

From Yieldi’s standpoint, a construction loan is a calculated investment. The presence of a GC:

• Adds credibility to the project
• Ensures oversight
• Reduces borrower default risk

Draw Schedules and Project Milestones

Each loan is tied to a draw schedule. A GC signs off on milestone completion, which then triggers fund release.

No GC? No draw.

Inspections and Quality Control

Yieldi often engages third-party inspectors to validate progress. General contractors coordinate these inspections, address corrections, and help avoid costly delays.

What If I’m a Licensed General Contractor?

In that case, you’re one of the exceptions. Yieldi will still require additional assurances—proof of license, portfolio of past projects, and potentially third-party oversight on high-value builds.

Benefits of Acting as Your Own GC

Pros include:

• Lower total project cost
• More control over schedules
• Potentially higher profit margin on flips or investment builds

Hidden Pitfalls of Owner-Build Projects

However, owner-builder routes come with risks:

• Increased legal liability
• Higher stress from managing all roles
• Subcontractor management failures

How Yieldi Structures a Construction Loan

From initial application to the final draw, here’s how it flows:

1. Application submitted
2. General contractor vetted
3. Project plan reviewed
4. Loan funded in tranches
5. Inspections conducted
6. Final disbursement on completion

Required Documents from the General Contractor

• Valid GC license
• Proof of insurance
• Contract scope and bid
• Timeline and materials list
• Tax ID and references

Real-Life Example of a Smooth GC-Led Project

A borrower in Tampa submitted plans for a $650,000 residential build. With a vetted GC and precise milestones, Yieldi’s funds were disbursed across six draws. The project closed 14 days ahead of schedule.

A Case Study Where the Borrower Was the GC

In Texas, a borrower with a GC license undertook a duplex build. With a detailed portfolio and clean compliance record, Yieldi approved the exception. The build faced minor delays due to a subcontractor no-show, but ultimately finished on budget.

Yieldi vs. Other Lenders in Construction Loans

Unlike some hard money lenders who may offer leniency, Yieldi’s firm GC requirement is part of its strategy to minimize investor risk and maximize project success.

How General Contractors Impact the Bottom Line

A GC can either protect or inflate your budget. That’s why Yieldi recommends negotiating a clear, fixed-fee structure.

How GCs Ensure Timely Completion

Experienced contractors:

• Create project timelines
• Coordinate subcontractors
• Pre-order materials
• Address unexpected delays promptly

Red Flags in Contractor-Borrower Relationships

• Vague or missing bids
• Poor communication
• Unwillingness to sign a formal agreement
• No insurance or expired license

Can You Use a Project Manager Instead?

No. At Yieldi, a project manager is not a substitute for a licensed general contractor. Their roles differ significantly in legal accountability and licensure.

What Happens if You Skip a GC Anyway?

If you submit an application without a GC, it will be rejected unless you are licensed. This is non-negotiable for Yieldi.

Legal Consequences of Non-Compliance

Skipping the GC requirement can:

• Void insurance coverage
• Breach local regulations
• Invite lawsuits from injured subcontractors

Frequently Asked Questions

Do construction loans always require a general contractor?
At Yieldi, yes—unless the borrower is a licensed GC themselves.

Can I act as my own GC?
Only if you have an active GC license and meet Yieldi’s additional requirements.

What documents does the GC need to provide?
License, insurance, signed contracts, timelines, and budget breakdowns.

Why does Yieldi insist on a GC?
To protect the borrower, lender, and project from unnecessary risk or failure.

Can I hire a GC mid-project?
Possibly, but it will complicate underwriting and delay funding.

Is a project manager enough to get funding?
No. Yieldi requires a licensed GC—project managers don’t fulfill this role.

Conclusion

Construction loans are complex financial instruments tied to physical progress. That’s why Yieldi requires a licensed general contractor on every project—unless the borrower holds a GC license. This not only ensures project success but also provides peace of mind to everyone involved.

If you’re planning to build, remodel, or develop, make sure to bring a GC to the table—or become one yourself.