Timing could not be better to begin a construction lending program. A new Homeownership
Alliance study projects housing demand will require the construction of over
two million new homes annually for the next decade.
The study report, “America’s Home Forecast: The Next Decade for
Housing and Mortgage Finance,” predicts that homeownership will exceed
70 percent in the U.S. population by 2013. To capitalize on this expanding market,
credit unions need to:
- Staff the new program
- Form business partnerships
- Establish risk-based pricing
Staffing the program
Because construction loans involve unique guidelines and procedures, staffers
have special responsibilities not found in other loan programs. They must approve
disbursement requests with the borrower and builder, work with investment partners,
deal with contractor problems, and grant change orders to existing projects.
It’s no wonder construction loans are more time intensive than other loan
Credit unions can either train their own staff or hire seasoned outsiders for
Columbia Credit Union in Washington State already had staff members on board
with extensive background in construction lending while ORNL Federal Credit
Union in Tennessee hired experienced staff externally. Both programs are now
in the top 20 for outstanding construction loans in the second quarter.
Forming business partnerships
Credit unions should explore potential business partnerships before starting
a construction-lending program. Strong business partnerships help both the day-to-day
needs as well as the long-term sustainability of a credible construction lending
program. These partnerships can provide expertise and leads that credit unions
would not have alone.
For instance, credit unions can partner with title companies that specialize
in inspecting property, verifying there are no outstanding liens, preparing
disbursement payments to contractors and providing closing services to the loan.
Establishing risk-based pricing
Credit unions have two options for how to price construction loans:
- Charge the same rate to members regardless of credit score.
- Create a sliding scale that offers different rates to members based on
Credit unions have been successful pursuing both strategies, thus the decision
should be based on which option fits with a credit union’s current practices.
Space Coast Credit Union in Florida offers the prime rate on member construction
loans to 90 percent of applicants. “This allows us to make loans to more
members without adding excessive risk to the membership,” said Tom Baldwin,
chief financial officer at Space Coast.
In contrast, Central Minnesota Credit Union developed a four-tier approach
based on an applicant’s credit score. Members fall into one of the following
- 680 and up
- 599 and below
Close to 75 percent of the construction loans are in the top tier credit rating,
comments Doug Welle, a real estate loan officer at Central Minnesota. “If
it is a borderline case, the credit union may not want to approve the loan.”
For more information on how to start a construction lending program, pre-order
Callahan’s newest independent research report Building
a Successful Construction Lending Program. It will be released on Oct.