5 Fantastic Reasons Why You Need To Offer Construction Loans


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

The national housing market is suffering from a severe shortage of housing inventory across the country. According to Metrostudy, housing starts for 2016 were 1.22M and the forecast for 2017 is up slightly at 1.23M starts. The demand far exceeds supply.

Compare these numbers to the 2.1M starts at the peak of the previous cycle in 2005.  The impact of the housing shortage is forcing new home prices up and rents to historic highs.

You have an opportunity to take advantage of the resurgence of construction financing that will be coming as the country seeks to recover from this 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 Active

The secondary mortgage market has been very active in providing consumer construction to perm loans to nondepository 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 products for both vertical construction loans 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 perm 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 turnkey construction lending solutions 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 and solutions, 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!