In 2006, the overall single family construction lending market is estimated at $265 billion. Most mortgage providers, including credit unions, are finding that the continued downturn of home purchase and refinance activity is challenging the sustainability of mortgage business growth. Credit union mortgage departments are seeking creative ways to capture a bigger share of loan business. One virtually untapped market is the “diamond in the rough”--construction loans.
Millions of dollars are needed to finance new homes in your backyard, community, or state each year. The average median new home price is $230,000, which is considered affordable housing in many areas. If you are not financing your member's new home construction loan, who is? What are you doing to attract new members and grow your loan portfolio?
Construction loans have several attractive characteristics -- including higher interest rates than traditional long-term fixed-rate mortgages, new collateral, lower loan-to-values, and short-term loan duration (12 months or less). They also present an affordability option for home buyers thanks to one-close construction-to-permanent mortgages. Furthermore, they help credit unions establish relationships with builders and realtors involved in these transactions.
Credit unions have the option to fund two loans per transaction—an interim construction loan and an end mortgage. Should the credit union opt to fund only the interim construction loan, the end mortgage can be packaged and sold to FannieMae or secondary market investors as a construction-to-permanent mortgage.
The Three Cs—And They're Not Cut, Color and Clarity
When underwriting a mortgage or construction loan, there are three Cs to evaluate: collateral, capacity, and creditworthiness. New home construction financing certainly offers the best collateral because everything in the home is new. The capacity of the borrower is also enhanced because he or she is handed keys to a home with a new roof, new appliances, new floor coverings, new heating/ventilation system, new plumbing fixtures, and new siding/brick exterior, as opposed to an existing, used home that may present several repair or replacement costs. Unexpected repair or replacement costs can place a potentially significant debt burden on a new home buyer, which can impact the ability to repay the mortgage obligation. The creditworthiness of the home buyer should be assessed similar to the process for a traditional mortgage transaction. The construction loan should be underwritten upfront based on criteria needed for a permanent end mortgage. Once the home is complete, the construction loan is repaid by the permanent end mortgage.
Construction loans have characteristics that can add some sparkle to a credit union's return on assets, equity and loan growth. Now more than ever, home buyers need the kind of low-cost financial services that credit unions provide, especially in regard to affordable construction financing options. Ultimately, credit unions must embrace the ever-changing demands of home buyers, who today want more options including brand-new kitchens, baths, modern appliances, and custom paint and decoration. Just as diamonds are forever, construction loans provide the opportunity for your members, potential members, and those within your community to improve their quality of life on a permanent basis.
Credit unions seeking ways to fill their mortgage lending or investment portfolio by funding construction loans from loan leads provided at no cost to the credit union should contact Dawn Rudie at CLC: firstname.lastname@example.org
1,2 Source: McGraw Hill Construction
The Construction Loan Company, Inc. is a Prime Alliance Solutions Multi-Site Construction Lending Partner