Shannon Faries, Director of Risk Management
Consumer Construction-to-Permanent (CTP) loans are arguably a smart space for any loan originator to enter as soon as possible. At the moment, housing inventory levels in nearly every US market have never been lower. Multiple government agencies are also rolling out new loan products designed to refine and streamline the construction loan process, not to mention these kinds of loans can help build connections and business for originators.
Construction-to-Permanent loans can be built around both real estate agent and builder referrals, which most loan originators already cultivate in one way or another. However, these referrals are also driven and maintained by gaining knowledge and expertise in CTP loans, including how to close them.
When starting a CTP loan program, it’s important to know what you’re selling. While the borrower may not need to understand the intricacies of every option, originators can buoy their CTP success by clearly understanding differences, especially when presenting product offerings.
Two-time close CTP loans require a borrower to qualify for the loan two separate times: once for the construction loan and then again for the take-out that pays off the construction loan, so the construction lender knows how the loan will be paid off. In addition to multiple credit checks, this kind of loan exposes the borrower to risk regarding interest rate fluctuation during the construction period because it could easily be up to a year before the permanent rate for the loan is locked in.
Single-close (SC CTP) loans combine the features of a construction loan and an amortizing mortgage loan under one promissory note, one mortgage, one set of loan disclosures, and requires only one credit qualification for the borrower. From my experience, the streamlined features of SC CTP loans are what modern consumers are looking for.
A strong familiarity with construction-to-perm products and understanding the needs of the borrower are crucial for maintaining relationships, ensuring customer satisfaction, and generating positive referrals. Here are 5 keys to originating successful construction loans:
1. Focus on Loan Features
A borrower’s potential ignorance of the key features of their construction loan could jeopardize their ability to qualify and obtain the best possible mortgage. Understanding CTP loan features will position you as a construction lending expert, giving the customer confidence in your ability to help them.
2. Set Clear Borrower & Builder Expectations
Construction loan transactions require more due diligence and review work compared to other loan types. The project must be reviewed for completeness, the builder must be reviewed for various risk factors, and there are additional construction related documents like the contract and budget that must be reviewed and approved by the lender. Although the process may seem complicated, if you set the right expectations about processing time frames, you will have happier customers and happier builders.
3. Explain Fees Paid by the Borrower
Construction projects require review fees, inspections fees, loan administration fees, and additional title update fees. These are all necessary parts of the loan transaction that are paid by the borrower, and if they understand this from the beginning, you help protect yourself and the borrower from any last-minute surprises.
4. Prepare to Answer Common Construction Questions
First-time construction borrowers are likely to have a few questions: Do I pay any principal or interest during construction? What if I have a disagreement with my contractor? How can I stay up to date on the progress of work? Why does my builder have to be reviewed by the lender? Providing clear, confident answers to questions will put any of your borrower’s worries to rest.
5. Review Document Package
You, as the originator, can review the document package to help ensure a successful closing process. Have you gathered all of the required documentation that your construction program specifies? Have you checked that documents are signed and dated? Checking and double checking the minute details makes sure closing is a straightforward process for everyone involved.
Next Steps for Originating CTP Loans
For the originating lender, a SC CTP loan transaction adds another purchase loan product to their offering. The SC CTP loan is a loan meant for the secondary mortgage market and therefore does require a lender to be a depository institution. Even if the lender is a bank or other depository institution, it is not required to have the asset liability match needed to collect a loan in a portfolio. This means the loan can be sold on the secondary mortgage market which frees up liquidity.
The SC CTP loan offers a great lending opportunity to sell features, convenience, risk management, and consumer savings in one neat package. All it takes is a little patience, research, analysis, and a clear understanding of the benefits of SC CTP lending to capture the potential of this booming market.
The opinions and insights expressed in this blog are solely those of its author, Shannon Faries, and do not necessarily represent the views of either Mortgage Guaranty Insurance Corporation or any of its parent, affiliates, or subsidiaries (collectively, “MGIC”). Neither MGIC nor any of its officers, directors, employees or agents makes any representations or warranties of any kind regarding the soundness, reliability, accuracy or completeness of any opinion, insight, recommendation, data, or other information contained in this blog, or its suitability for any intended purpose.
Director of Risk Management at Land Gorilla
Shannon Faries is the Director of Risk Management at Land Gorilla, the #1 construction loan management software provider, offering industry best practices to Mortgage Banks, Commercial Banks, and Credit Unions looking to minimize risk and maximize efficiencies in construction lending.