Construction Finance Technology in Today’s Market
Construction finance technology touches more areas than you may think. First, it helps to solve the housing crisis by better getting funds to people who will build or renovate properties suitable for sale. Second, it has a direct effect on recruiting and retaining top talent. And third, digital experiences are rapidly becoming expected by borrowers.
- America has greatly underbuilt after the recession, and many factors contribute to the lack of current housing. However, one way lenders can make a change is by making it easier for developers to work with you as they seek to build new homes.
- 71 percent of Millennial loan advisors say that a potential employer’s use of technology influences whether they’ll work there. This is perhaps driven and substantiated by a study that found technology-based lenders process mortgage applications about 20% faster than other lenders while decreasing the default rate by about 25%. Lenders who want to recruit and retain top talent need to be seriously looking at their tech stack.
- But technology doesn’t just entice loan officers. Borrowers want it too, and have the habits to match, as 74% of all borrowers used an online portal to work with their lender.
With this in mind, let us begin to consider how construction finance technology could affect you by looking at your current processes.
Evaluating your Construction Finance Processes
If you truly want to grow your business, then you need to ask yourself if you are properly set up to meet this demand. Now is not the time to settle for the status quo when it comes to the loan process.
It will come at a cost, whether it’s revenue, employees, or customers. The following list of questions helps you see how current processes work and spotlights the areas that need improvement.
1. How much time is spent processing each draw request?
One commonality of every construction and renovation loan is the draw request. How much time is spent processing each draw request? Perhaps the question you should be asking is, “How long does it take a contractor or builder to get paid the draw?” Some might feel those are the same questions, but let’s take a quick look at the actions and time frame that occur in the draw process:
- The contractor submits the draw. To do so, he must be in a location with a printer so he can print and fill out the form. Then he needs to get the form to the borrower for signatures; either by hand delivery, email (requiring a scanner) or mail. Then that process repeats to get the form to you, the lender. So before you even see the request, the draw process has already taken an average of 3 days.
- The lender receives the request. You’ll be very familiar with this process. How many days does it take to verify proper signatures on the correct forms, order an inspection, approve the inspection, check the title, and obtain signatures? We have found that this process takes about 7 days.
- The lender approves the draw. This is what everyone has been waiting for, but very rarely are the funds available immediately. The contractor/builder typically have to wait a minimum of 3 days before they have access to the money, and too many contractors report having to wait months for payment. For more information on the real draw process timeline, view this infographic here.
With this in mind, take a hard look at the averages of time spent on the entire process, and consider how a technology solution can bridge the gaps from offline behaviors to online behaviors.
2. Can your company handle an influx in construction and renovation loans?
This is a fun one because it’s a great problem to have. What if your company had a significant uptick in construction loan volume? What would happen? Here are a few possibilities, perhaps this might be your situation:
a) Uh-oh. Our team of two definitely doesn’t have the bandwidth
b) Finally! My team has something to work on!
c) We can take it on— if we cut some corners and take a few risks
Those light-hearted examples show that different lending institutions are in different positions, and the best position to be in when an influx of loans comes your way is being able to scale with low risk. First, look at your current teams, systems, and procedures. Would anything hinder the ability to scale, and is there more than one point of friction to take on these loans?
Consider your friction point, then consider what kind of technology you would need to help you scale. Think of it this way: construction and renovation lending is like any other loan product; it ebbs and flows with demand and market conditions. You need to make sure you can ramp up when necessary, and make sure an entire department is healthy when there are fewer loans coming through the pipe. Consider that technology can help lenders do more with less; a single person can manage more loans with the right tech.
3. What is the impact of your current process on borrowers and builders?
Have you ever rolled your eyes when the person in front of you in the checkout line gets out a checkbook? With so many faster means of payment available, many people don’t understand when someone else deliberately takes the slowest possible path. And yet, manual construction and renovation lending often uses the slowest possible path.
A borrower may do the majority of their banking online with your institution, so they are used to a digital experience. So what happens when they have a renovation loan with you? Does the customer experience vary greatly?
Think of the builder’s perspective. We’ve already gone over how the draw process affects them, but what about this: builders are a great source of referral business, and builder’s know their clients (your future borrowers) want digital experiences.
4. How could efficiently managing draws impact your bottom line?
Lenders are focused on profitability. And as you’ve seen above, inefficiencies in the draw process can hinder the customer experience for the borrower and the builder.
But what does that do to your bottom line? Are you losing money? Are you just breaking even? If the status quo is spreadsheets and manual construction and renovation loan processes, it’s easy to say your current draw process is good enough. Or is it?
For lenders, time is money. Because of this, loan terms must be adhered to, especially if you want to sell to the secondary market ASAP.
Construction in general can be dependant on external factors such as weather, labor shortages, and trade policies. With all of these fluctuating factors, lenders who understand that time is money will be looking for ways to implement a process that they can control as tight as possible.
So, take a look at your draw management process. Is it slowing things down? Are there areas for efficiency improvements to keep the project moving at the correct pace? And as noted above, your time could be used in other ways that will help close more loans.
5. What is getting in the way of a more efficient draw process?
Surely by now you have at least one answer to this. Maybe your teams experience too many duplicate manual entries that makes the process tedious, time consuming, and error prone. Or, perhaps you see efficiencies could be found if borrowers could see the status of their loan or builders could see the status of their draws through an online portal or app instead of calling you every day. Perhaps obtaining signatures in a timely manner is causing delays.
Whatever it is, take inventory of your entire process and identify your pain points. These are key points to identify when you evaluate construction finance technology solutions to expand or start your construction lending program.
One final question for you — If your process was smoother, would you want to take advantage of the growing opportunity in construction and renovation loans?
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