Are construction loans part of your toolkit?

While recent low mortgage rates have translated into land-office refinance business for many mortgage pros, originators still need to have a diverse toolkit to keep business booming once the refi trend cools. And handled correctly, the construction loan can be a powerful tool in that kit.

In most cases, when borrowers buy a new home, they choose from a limited palette of customization options offered by the builder, said Rudy Marquez, managing director of construction at GO Mortgage.

“In essence, you’re building the same cookie-cutter home that’s in the community,” he said. “And for some people, that’s great. But other borrowers want to build a true custom home – design it, possibly build it on land they already own. For those types of borrowers, you need special financing.”

In those cases, Marquez said, borrowers generally need two loans – a construction loan with a term of 12 to 18 months, and a more traditional mortgage once the home is completed for long-term financing. That can lead to headaches for the borrower, the builder and the lender.

However, some mortgage companies, including GO Mortgage, offer a single-close construction loan – one loan to cover both the construction of the home and long-term financing.

“We also structure both the acquisition and the construction of the home. That borrower is approved one time,” Marquez said. “Once we do the closing, we go directly to the construction phase. Once the home is completed, there’s no second closing. That means the borrower’s expenses are done. We’re saving the consumer on a second closing, we’re providing a pretty seamless experience for them and for the builder, and we’re enabling them to finance their dream home.”

Borrowers also don’t have to worry about being stuck with a higher interest rate if rates drop during the construction of their home, said Bruce Olster, senior managing director of construction at GO Mortgage.

“We’re all sensitive about getting the best interest rate for our permanent loan,” Olster said. “What if I sign up today for a permanent loan at 4%, and then rates drop down to 3.5%? If the market has dropped half a point, they’re going to see a better interest rate. We automatically evaluate you for a float-down, and it doesn’t cost the borrower anything.”

Marquez said that all originators should consider adding construction loans to their arsenal of products.

“Refis aren’t going to last forever,” he said. “We’re in this low-interest-rate environment, and everybody’s refinancing. That’s great. In the middle of all this chaos and uncertainty, this seems to be one of the few positives. However, that’s not going to last forever. At some point interest rates are going to begin to rise, and then lenders are going to have to face the very real decision of where they’re going to find their volume growth. Originators need something that’s going to both fulfill a need and set them apart as unique.”

Olster said that single-close construction loans can also be a boon to originators’ builder partners.

“The builder is effectively using the borrower’s balance sheet to build, because the borrower has already been approved for the loan,” he said. “They can expand their business by doing more builds, because they don’t have to rely solely on their own balance sheets to build. It allows a small to medium-sized builder to compete with larger builders. … So the product is really an enhancement to the relationship of the originator and the builder.”

And demand for single-close construction loans has been going up, Marquez said; one of the side effects of the COVID-19 outbreak has been to push former city dwellers into the suburbs.

“Articles are coming out almost every day in the San Francisco Bay area about how people are fleeing the city because of the pandemic,” he said. “You didn’t used to have a huge population looking for real estate in the suburbs, but now you do. The pandemic has created a situation where there’s a demand for additional inventory.”