There’s nothing new about construction loans, but there is a new way of doing them.
A construction loan is typically comprised of two parts: the construction phase loan and the construction-to-permanent loan. During the construction phase, the buyer is paying interim interest on that loan until the home is completed.
What’s emerging is a product known as the single close construction loan, which few lenders offer. GSF Mortgage Corporation, based in Wisconsin, is one of those lenders. The single close construction loan offers just one loan, and the interest is deferred until the home is completed. It’s one change that could make a difference for thousands of people looking to get into the market, for a couple of reasons as indicated by Chad Jampedro, president of GSF.
“Typically it’s going to be a lot less closing costs because you’re not paying closing costs on two loans, you’re only paying it on one. You’re not paying the interest payments during a period of time where you’re carrying another housing debt. You may be selling your home or renting and then you’re paying interest on the home that’s being built,” which could result in very cash-strapped borrowers.
With most construction loans, the expectation of down payments is anywhere between 10-20%. Between the high down payment and the additional housing costs in interest while their home is being built, a lot of first-time home buyers are eliminated from the buying pool. The single close construction loan eliminates those factors. It’s typically paired with an FHA, a VA or a USDA product, which has low down payment options.
“Now, with that lower down payment and without that carrying costs, it allows for more first time buyers or buyers who don’t have that 10-20% down to get into the building market where typically they’ve been locked out,” Jampedro said. “The reason it’s been successful for us is because in this market, with the tight inventory, we’re now able to create inventory and create options for borrowers who typically would’ve been your first time buyer buying an existing home, now we can convert those buyers into a build, and they’re building their first home instead of buying.”
Jampedro says that the demand has really increased from both buyers and builders.
“I believe the demand now is there. When we’re generating leads through some of our online channels, it’s 2-1 construction over your traditional purchase,” he says. “And if the demand from the consumer is there, it certainly will be there for lenders.”
To this end, GFS is considering some strategic partnerships that will allow other lenders to take advantage. And although the demand for construction loans in general is on the rise, Jampedro says that it’s still an underutilized product even though it’s a win-win proposition that’s beneficial for builders as well as buyers.
“They have a balance sheet just like any other business,” he said. “And with a single close construction, we take the land, and they get their first draw at their closing . . . instead of a balance sheet deal, it makes it very liquid very quickly. So it gives a builder relief and allows them to build more properties utilizing the financing that they have, so they’re not floating as much as they typically would with other products.”
GSF provides the single close construction product in-house, and although it’s a very “process-intensive” loan that scares a lot of lenders, the single close element is a vast improvement on the way construction loans used to be handled.
“It was just a drag. Because [a wholesaler is] dealing with all of the moving parts and communication is somewhat in a vacuum, you would just have difficulty,” Jampedro said. “Then you would have a borrower who typically is in their construction phase, builders who would be unhappy with it because the draw administration could be slow, so we said you know what, we want to be in this market, we don’t want it to go anywhere else, we want to do it, build the process ourselves and then service those loans. So over the last two years, we went ahead and did it, and lo and behold, here we are in 2018 and there’s a tremendous need for the construction product, so a little happy accident for us.”