In one sentence
Surety bonds guaranteeing that a contractor will complete the work and will pay its subcontractors and suppliers.
The longer version
The performance bond answers completion risk: if the contractor defaults, the surety must complete the project or pay the cost of completion up to the bond amount. The payment bond answers lien risk by standing behind payment to those below the contractor.
Lenders check the surety's rating, whether the bond names the lender as dual obligee, and what notice the surety requires. A bond that does not name the lender may leave it without standing to make a claim, which is a detail worth confirming at closing rather than at default.
Common questions
- What is a dual obligee rider?
- An addition naming the lender alongside the owner as a beneficiary, so the lender can claim on the bond directly. Without it the lender may have no standing against the surety.
- Do bonds replace a completion guaranty?
- No. A bond is capped at its penal sum and is subject to the surety's defenses. Lenders typically require both, with the sponsor guaranty covering what the bond does not.
- What should a lender check on a bond?
- The surety's rating and licensing, the penal sum against the contract amount, the dual obligee status, and the notice and claim procedures.
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