Residential Mortgage Lending: Principles and Practices, 6e

© 2012 Cengage Learning

© 2012 Cengage Learning© 2012 Cengage Learning

Residential Mortgage Lending:Principles and Practices, 6e

Chapter 9 Construction Lending


Objectives• After completing this chapter, you should be able to:

– Understand the importance of housing starts and construction lending to the entire economy.

– Explain which lenders make these loans and why they offer these loans.

– Discuss the process of advancing funds for a construction loan.

– Examine the similarities and differences between construction loans and permanent financing.

– Explain the process of originating a construction loan.


Who Does Construction Loans?• All types of mortgage lenders participate in

construction lending: commercial and national banks, thrifts and community banks, credit unions, and mortgage companies.


Construction Lending Basics A. Advances or Draws

B. CollateralC. Construction loan versus permanent loanD. TermE. Phases of DisbursementsF. Schedule of disbursementsG. RepaymentH. Who Is the General Contractor: Builder or Borrower?


Residential Construction Loans• Construction Only (with two closings)• Construction/Permanent (with one closing)• Builder Speculative Construction


Construction Loan Management Review• Repayment history• Stage of construction • Mechanic’s lien waiver documentation• Percent of total loan advanced • Advance history• Date and amount of the last advance • Time remaining in the construction phase of

the loan


Construction Loan Origination● Building plans and specifications● Plot plan and site survey● Building permit● Builder’s license and liability insurance


Construction Loan Origination● Inspections for water, well, perk,

other● Material list and cost estimates● Contracts for materials and work to be

performed● Payment receipts for materials

purchased and work performed


Loan Administration and Funding● Completion certificate● Recertification of value● Certificate of Occupancy/temporary

Certificate of Occupancy● Complete mechanic’s lien waivers


What Do You Think?• Why do lenders participate in residential construction lending?• How are construction loans structured? • What are the benefits and drawbacks for both the lender and borrower in using a “two closing” loan

products? A “one closing”?• How do construction loans differ from first mortgage, home improvement or home equity loans?


What Do You Think?• What should a lender review when managing a construction

loan portfolio? • Explain the construction and funding process • What is the difference between “purchase price” and “cost to

construct” for new construction properties?


Check Your Understanding1. Over the past ten years the average number of new single-

family housing starts has been approximately 1 to 1.3 million.

2. Construction lending is inherently different from permanent financing because of the way funds are disbursed.

3. The most common method for closing construction loans is to close both the construction loan and the permanent loan at the same time.

4. The mechanic’s lien in most states takes priority over the first mortgage – even if it is filed after loan closing of the first.


Check Your Understanding5. Appraisals for new construction are completed using

plans and specifications. 6. If the applicant for a construction loan is the builder the

mortgage lender will not require a credit check. 7. Before issuing the final advance the construction lender

must obtain a certificate of occupancy. 8. Many lenders will not make a construction loan to a

general contractor who will be the homeowner.

Documents

Residential Mortgage Lending: Principles and Practices, 6e