A construction project can attractive on paper until an incomplete budget, an inexperienced builder, or a weak exit strategy causes problems with deal. Recognizing these risks early can help mortgage brokers build stronger loan submissions and prevent needless delays when securing financing.
U.S. construction spending was down 1.7% year over year in August, and housing completions were down as well. In other words, careful deal evaluation has become even more important. These deals can still be very lucrative though, and the brokers who can put together clean, complete files will have an edge on the competition when it comes to closing these deals.
With a traditional mortgage, the finished home secures the loan. With new construction, however, the lender is financing something that does not exist yet. That shifts underwriting’s focus toward four questions:
Start with the borrower before you spend time on the project documents.
Construction loans generally require a 20% to 25% down payment. Document the source of funds with bank statements, and confirm reserves beyond the down payment.
Ask for a track record of completed projects, including addresses, property values, and timelines. Experience with similar scope and scale carries real weight in an application.
Lenders will look closely at credit history, because they don’t have a property to act as collateral on the loan. Get clients to pull their reports early, correct any errors, and reduce debt if possible. A DTI of 50% or less is typically ideal, although stronger borrower profiles may be an exception.
Underwriters give heavy weight to project economics. Confirm each of these before submission:
Use this table as a starting point for building a comprehensive loan submission.
|
Category |
What to Collect |
Why Underwriters Care |
|
Borrower finances |
Credit authorization, bank and asset statements, tax returns, personal financial statement, DTI calculation |
Confirms ability to carry and complete the project |
|
Entity and ownership |
Corporate documents, ownership structure, guarantor information |
Clarifies who is liable and who controls the project |
|
Land |
Deed or purchase agreement, existing loan balance, survey, title work |
Establishes collateral and borrower equity |
|
Plans and specifications |
Architectural drawings, material list, engineer or architect compliance letters |
Supports cost accuracy and appraisal |
|
Budget |
Line-item hard and soft costs, contingency, interest reserve |
Shows funding is sufficient and realistic |
|
Builder |
Signed contract, license, liability and builder’s risk insurance, references, past projects |
Verifies capability and coverage |
|
Valuation |
Subject-to-completion appraisal, as-is and as-completed values |
Sets the loan amount against value and cost |
|
Permits and approvals |
Building permits, zoning, utility, environmental reports |
Proves the project can legally proceed |
|
Schedule and draws |
Construction timeline, a draw schedule tied to inspections |
Aligns funding with progress |
|
Exit |
Sale plan, refinance plan, or a construction-to-permanent transition |
Shows how the loan gets repaid |
Here’s a quick checklist for brokers to run through before submitting a loan application.
|
Stage |
Broker Action |
Red Flag to Catch |
|
Pre-qualification |
Confirm experience, liquidity, site, plans, and rough budget |
Thin reserves or no completed projects |
|
Term sheet |
Choose construction-only or construction-to-permanent, review draw terms and fees |
Exit strategy that does not match loan type |
|
Third-party review |
Order appraisal, budget review, contractor vetting |
Appraisal relying on sum of retail sales instead of value to one purchaser |
|
Closing |
Confirm title, insurance, permits, and signed loan agreement |
Missing permits or lapsed insurance |
|
Funding and draws |
Verify inspections before each draw, track budget against progress |
Draw requests ahead of verified work |
|
Payoff or conversion |
Confirm takeout commitment or sale timeline |
Maturity landing before permanent financing is ready |
RCN Capital provides ground-up construction programs with in-house underwriting, draw-based funding, and broker protections, including a white-labeled loan management portal and resources that can help you grow your lending business.
Ready to submit your next construction deal? Visit our loan programs page to see how it fits into our guidelines, and submit your application as soon as you’re ready.