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New construction can be an extremely rewarding strategy for real estate investors, especially in today’s low inventory market environment. These properties allow investors to provide desirable homes to underserved markets while also taking in a healthy profit. As a broker or lending partner, understanding this asset class and how to provide financing for it is key to growing your business and offering superior service to your clients. Expanding your product offerings also gives you access to a new segment of clients and the potential for repeat business and referrals.
Interested in learning more about new construction financing? Continue reading for a quick guide for brokers and lending partners.
Understanding New Construction Loans
First, let’s cover the basics of new construction loans and how they differ from conventional home loans. There are two types of construction loans: Lot Loans, which are used for purchasing a parcel of land, and Ground-Up Construction Loans, to pay for the materials and labor used in building the property. These loans can be combined, but some lenders only offer one variety, so it is important to understand the distinction.
There are also two varieties of Ground-Up Construction Loans: Construction-Only and Construction-to-Permanent. Understanding which type to offer will depend on the exit strategy of the borrower. Construction-to-Permanent loans allow borrowers to easily transition to a 30-year mortgage, which is perfect for those planning to live in or rent the property after it’s built.
Furthermore, it’s important to understand that new construction loans come with higher interest rates than conventional mortgages. Since most home loans are backed by the property being financed as collateral, there is much more risk when lenders offer new construction financing, as there is no existing property to use as collateral. The elevated interest rates help compensate for the higher risk lenders take on with these loans. As a broker or lending partner, it’s up to you to help clients understand these concepts, so there are no surprises when they go out to seek financing.
Why Brokers Should Offer New Construction Loans
As a broker or lending partner, you can benefit from adding new construction programs to your loan offerings. It gives you the chance to tap into a growing segment of new construction investors, especially in markets with low housing inventory. It also positions you to expand your client base with builders, developers, general contractors, and other housing professionals looking to scale their businesses. New construction loans also tend to come with larger loan amounts, which means great commissions for brokers and lenders. Finally, these products help you stand out from other brokers by letting you offer a wider range of loan programs, beyond the standard rental and fix & flip financing most lending partners provide.
Key Factors Lenders Consider
There are some key factors to consider when assessing the viability of a construction project and how likely a borrower is to secure financing. First is the overall experience level of the borrower; have they completed construction projects in the past, or barring that, major renovation projects/flips? If not, it may be more difficult to secure a loan. Next is the overall feasibility of the project. This includes both cost estimates and evaluating market demand to determine ROI. The borrower’s exit strategy is important to evaluate too, whether it involves selling the property or renting it after construction is completed.
It will also be worth evaluating the project’s Loan-to-Cost (LTC) and Loan-to-Value (LTV) ratios. Lenders will have different limits on these percentages, varying with the experience level of the borrower. Knowing these values beforehand will help simplify the loan application process.
How Brokers Can Help Secure New Construction Loans
Brokers can help their clients in securing new construction loans by matching them with the right lenders and assisting them with the due diligence process. We mentioned the importance of evaluating costs and market evaluation for determining ROI; these numbers will be helpful for securing a loan as lenders can use them to properly evaluate risk. Brokers should also compare several different lenders and loan options to find a program that best suits the borrower’s needs. From there, you can help the borrower prepare a strong application by gathering project plans, timelines, and financial documents, and connecting them with experienced builders and other construction professionals. The more you can present to a lender the better; it not only shows dedication to completing the project, but can also help alleviate risk and increase the chances of loan approval.
Final Tips for Brokers to Close More New Construction Loans
As a broker, you can utilize a few tactics to help you be more effective in the new construction lending space. Stay up to date on market trends in the areas you serve, so you can understand both the level of demand for new construction, and any opportunities that may come up. You should also strive to build working relationships with developers and builders, not only so you can recommend trusted professionals to your clients, but because they might also become new clients for you.
Leveraging technology will also help you become a better expert in the new construction space. Sites like ATTOM Data and REiDEALMASTER can help you conduct market research, due diligence, and project estimates. Additionally, loan origination systems like BLN Software can help you streamline your loan submission process, giving you more time to focus on acquiring new business.
RCN Capital
The best way to save on a real estate investment is to obtain financing from a lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a new construction project, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.