So you have decided to offer renovation and construction loans. This is a great choice! Renovation and construction lending programs provide a great revenue source, and it helps to solve housing issues in your communities. Did you know the average house in the U.S. is over 35 years old, which is the highest the average has been in nearly 100 years. Baby Boomers and Millenials, two of the biggest populations the US has ever seen, at 75.4 and 83.1 million respectively, are starting to need housing at the same time and are putting pressure on existing housing inventory. A majority of those millennials are currently saving for their first home. Zillow projects that there will be 3.11 million first-time home buyers entering the market by 2028. Additionally, natural disasters have risen in occurrence by six times since 1980, leaving loss and destruction in their path while displacing residents who will then need temporary housing before they are able to rebuild. Between aging homes, increasing populations, and natural disasters, the need for new or renovated housing is apparent. If you’ve made the business case to offer these types of loans, you’ll probably think it’s time to start lending. But not so fast.
What Lenders Don’t Know About Renovation and Construction Lending
It takes lenders by surprise to discover that a successful construction and renovation loan program first includes some legwork. The success of the program actually lies in the policies and procedures you set up before you originate your first loan. Remember: the goal of creating these policies, procedures, and forms is to maintain low risk, gain greater control, and accelerate and scale your construction and renovation loan programs.
Seven Policies And Procedures To Include in Renovation and Construction Lending Program Development
The following list is not comprehensive, but it will give you a good base to begin. Each of the following should be tailored to your specific lending institution and department.
1. Risk Management Policy: The risk management policy is intended to address general construction loan risks and define your risk profile. Your governing executive group should ratify this statement as all policies and procedures moving forward will be structured around this framework. For more information on risk management for renovation and construction lending, see our blog, “Why Every Lender Needs a Risk Management Policy For Construction Lending” which includes a template outline to help you get moving in the right direction.
2. Construction Loan Origination Training: Providing basic training and orientation into the construction loan process is a must for the loan originator. Design the training to cover everything from understanding and becoming proficient in the loan product to in-house policies, industry best practices, and federal and state regulations. This training will also be useful for when you are ready to scale the program and seek to bring more LOs on board.
3. Construction Information Guide for borrowers and contractors: Borrowers and contractors or builders will naturally have questions, and the lending institution should be keen on setting clear expectations about the program for all parties. Setting participant expectations is important before you begin on new originations.
4. Contractor acceptance questionnaire: A questionnaire can be used to determine if the contractor is a good fit for your project and risk management policy. You can create your own or use Land Gorilla’s which you can download here.
5. Contractor Acknowledgement form: We recommend preparing a document that will form a binding agreement between the lender and the contractor to perform in alignment to the borrowers’ construction loan agreement.
6. Draw administration policies and procedures: Just as loan origination should follow best practices in compliance with the risk management profile, post-close activities, (specifically draw administration) should follow specific and consistent best practices. This will aid each draw administrator servicing loans to work at an optimal level.
7. Construction Loan Agreement: The governing document between the client and the borrower. We recommend including this in the loan closing documents after the lender has obtained a legal review.
Before you originate, build a complete foundation for your renovation and construction loan program.
Your loan program development shouldn’t be overlooked. Starting your development with these seven items will help to protect physical, financial, and legal interests.
Land Gorilla feels so passionately about the importance of program development, that besides offering construction loan management software, we also offer professional services to take care of the development for you. If you have any questions regarding construction loan program development, please reach out to us and we will answer any questions you have.