Like many mortgage bankers, you may be wary about adding construction loans to your product line. You might be thinking construction loans are too complicated, you don’t have enough residential construction lending experience, or there are too many inherent risks associated with construction financing.
Perhaps, you don’t even know where to start. Right?
Despite the challenges, mortgage banks have a distinct advantage that positions them uniquely in the housing market over other lending institutions offering construction financing products.
Before we dive into all the details about developing a successful construction loan program, let’s highlight five reasons why you should consider offering your borrowers consumer construction-to-permanent finance options.
1. Housing Inventory Shortage Means More Opportunity For Construction Lenders
The national housing market is suffering from a severe shortage of housing inventory across the country. According to the US Census Bureau, while housing starts reached 1.22M in August 2018, this was 5.7% lower than starts in July 2018.
More troubling, these figures are 5.5% lower than the number of starts in August 2017. Overall, The NAHB reports housing starts for 2018 are expected to reach 1.27M, which is slightly higher than total starts for 2017 which reached 1.20M.
Compare these numbers to the 2.1M starts at the peak of the previous cycle in 2005 and it’s easy to see current demand far exceeds supply. The impact of the housing shortage is forcing new home prices up and rents to historic highs.
Even if you are not interested in new construction to perm loans, the combination of surging housing prices and inventory shortages is presenting major opportunities regarding existing homes for homeowners. According to HousingWire and BuildFax, remodeling has increased 30% in the past 5 years, and annual maintenance volume is up 5% with a spending increase of 8% as of 2018. Their data also suggests that remodeling and renovation is even a popular option for home buyers; as they are priced out of new builds, renovations of existing properties are growing as an attractive alternative for buyers to still end up in their dream home.
Either way, you have an opportunity to take advantage of the resurgence of construction and renovation financing that grows as the country seeks to recover from this current housing shortage.
2. Significant Regulatory Changes Opened The Door For Mortgage Banks
Significant regulatory changes have shut off lending or reduced the ability of community banks to provide interim construction financing to both tract home builders as well as consumers wishing to build a custom home.
This has created an enormous void in the world of construction lending that depository institutions once dominated. Mortgage bankers are typically more nimble than a commercial bank and have a unique opportunity to fill the void left by banks.
3. Secondary Mortgage Market Is Enabling More Mortgage Banks to Participate
The secondary mortgage market has been very active in providing consumer construction to perm loans to non-depository lenders over the past several years.
Currently, Fannie Mae, Freddie Mac, FHA, VA, and the USDA all offer a one-time close construction to perm loan product. The secondary mortgage market is beginning to have a significant impact on the availability of construction loan products for both vertical construction lending and renovation lending.
This growth is leading to construction and renovation lending becoming more of a mainstream loan product and no longer the specialty loan product it once was thought to be.
4. Construction Lending Is Not Rate Driven
Interest rates have wavered this year pushing the refinance volume into a seesaw trending slightly upward most recently, according to the Mortgage Bankers Association. This instability of rates and fluctuating loan production has impacted mortgage lenders across the board, and astute lenders will be looking to add loan products that are not rate driven – this will include construction to permanent and renovation loans.
5. You Don’t Have To Do All The Work Yourself
So, what’s next? If you’re wondering how you can get started in residential construction lending, you have a lot to think about. Even though we can’t cover everything in the scope of this blog post, here are a couple initial next steps for you to consider.
First, search in your professional network for recommendations and people with construction lending experience. Word-of-mouth referrals are an excellent way to find the right construction financing advice and talent.
Keep in mind that finding the right people will take several months and developing a quality construction loan product can take even longer, if you’re not prepared.
We know the struggle. That’s why we designed a digital construction lending solution for mortgage bankers like you.
Leveraging the expertise of a construction loan management company, like Land Gorilla, will help you launch your loan product more quickly and implement industry best practices that you need to mitigate your risk.
In other words, you don’t have to do it all!
Take advantage of our industry knowledge, construction lending software, so you can concentrate on offering your borrower’s the best construction to perm loan product available; focusing on what you do best – closing more loans!