Few are the custom house projects that are entirely self-financed, most of the persons who engage in this endeavor needing the help of a construction lender to get the necessary funds to turn their dream into reality.
Since the principle “He that has the gold makes the rules!” is very true in this instance, the borrowers have to be extremely careful when complying to the requirements imposed by the construction lender, otherwise they wouldn’t qualify for the targeted loan program. However, playing your cards right in this context is quite a challenge because the construction lender doesn’t usually express what the rules of “the game” are until after you have broken one. Each construction lender has a specific regulation system, but there are several universal patterns that apply in all cases. Hence, the article is an attempt to show how construction lenders think in order to facilitate the application and bank approval stages.
The Construction Lender’s Perspective on a Borrower
First of all, you will be surprised to find out that a bank doesn’t consider a borrower as a true customer despite the politeness and friendly smiles displayed by the loan officer. As long as you don’t deposit money in the construction lender’s accounts, providing the institution “material” to invest, and come for a loan, you are viewed as a “necessary evil” involved in the making of profit. The pecuniary gains result from the transactions that the construction lender operates by loaning money at higher rates than it pays to the depositors. Hence, in the capacity of borrower, you need to ensure that you match as much as possible the standard “profile”.
Finding a construction lender to financially support your custom house building is difficult because banks no longer lend money based on relationships or personal knowledge of the borrower as it was done back in the days. Nowadays, most of the policies and procedures in banking are controlled by government regulators and statistics. Consequently, fewer and fewer banks agree to loan their own money for mortgages.
Selecting the Right Construction Lender – How It’s Done
After a period of trial and error, these institutions have adopted a more regimented system of underwriting, which aims at assessing the overall level of risk implied by a certain loan via an electronic mechanism. Thus, the construction lenders can better protect themselves against losses and more conscientiously select the appropriate clients eliminating the possibility of biased assessments. Therefore, if you happen to be rejected or distributed to a conditioned loan, don’t take it too personally. It means that your “case” has been analyzed by a machine which searched for the right parameters to qualify you for a certain program, but hasn’t find enough or any of them.
With science and technology having developed at an amazing pace, construction lenders have substituted the human underwriter with an electronic system that “scans” the customer’s paperwork and then passes it to the human “fellow worker”. Taking into account data from the performance of thousands of loans over the past decades and basing their risk-assessment algorithm upon credit scores and asset and income information, the computer programs ascertain the likelihood of default on a particular customer’s part. Raising the interest accordingly or suggesting denial altogether are other tasks performed by the computers. What a human underwriter is left to do is to check the accuracy of the input information and review documents that are more visual in nature, such as appraisals and tax returns.
Although the percentage of people who default their construction loans is very low (below 1 percent, as the Mortgage Bankers Association reports), banks don’t want to get involved in the real-estate sales business if not necessary and thus have designed the underwriting criteria to determine the people who have a higher probability of paying late or not paying at all. Apart from this aspect in the customer’s application file, construction lenders also examine and weigh the ability to sell the loan to investors. If the respective credit program fails, the original construction lender has to repurchase the loan from the investor with money which should have been used for other transactions.