| Why The Increase in Construction Lending and What Are The Pros and Cons?|
|I was speaking with one of my referring Realtors the other day and we had a detailed conversation about the current housing market. I could not help but to be enthralled in this deep conversation as there is so much going on right now, not just with real estate but its partner in crime mortgage lending (No pun intended by the use of the word crime).|
Listed below are bullet points of factors affecting the current real estate market, the mortgage lending market and construction lending.
• The mortgage meltdown - Because of the mortgage meltdown guidelines have tightened in order to limit risk to investors and many lending institutions have either gone under or have taken heavy losses.
• The real-estate bubble popped - Because of the "Bubble" market values were well above where they should have been and now we are in a free fall with home prices plummeting.
• Foreclosures - There are so many foreclosures out there that the housing market has a surplus of product waiting to be bought. Too many homes, not enough buyers.
• This has caused a buyer's market and people are looking for deals; many times this means they are buying fixer uppers; many of which are foreclosures that need rehab.
Which brings me to my point; Why the Increase in Construction Lending in Texas?
You guessed it, most foreclosures are in some level of disarray and need at a minimum minor repairs. I have seen about a 20% increase in rehab and/or construction lending over the past 6 months which I attribute to the many foreclosures on the market. You have your normal investors that fix up properties and then sell them and then you have your potential owner occupying borrowers that are looking to purchase their homesteads.
The potential borrower that is going to stay in the property is normally going to use a one-time or two-time close construction loan; they both have their Pros and Cons which are listed below.
One time close construction Pros:
• You only have to qualify once and you do not need to worry about closing twice.
• Once you are locked in and approved with a valid appraisal and clear title it's a done deal.
• You will have only one closing.
One time close construction Cons:
• MI companies no longer want to insure One-time construction loans so you will have to come to the table with a 20% down payment.
• You will end up with an interest rate that is about.5% to 1% higher than the market rate.
• One time close construction loans are only available on the conventional side of the business and chances are you will not be approved unless you have a 720 to a 740 credit score and above.
Two time close construction loan Pros:
• You will end up with a better loan than if you were to go with a One-time close construction loan.
• You will have both Conventional and Government options for your final loan.
• Because of the government options for your permanent loan the credit requirements are lower than the One-time construction loan option.
• So long as you have a valid exit strategy for getting out of the actual interim loan you will be approved for the interim loan.
Two time close construction loan Cons:
• You will have 2 closings.
• Should something happen to your credit profile during the construction period your approval for the permanent loan could be impacted. (There are things the client can do to limit this risk).
While a construction loan can get complicated they normally run pretty smoothly, in the current market should an issue arise it is normally with the appraisal.
This is an overall break down of the pros and cons involved in residential owner occupied construction loan for both One-time and Two-time close construction loans. There is obviously quite a bit more to it so please don't be afraid to contact me directly. I limit the number of clientele I take one in order to provide better service so I am currently only taking on clients in Texas with estimated loan amounts of $200K or higher. Regardless of whether I can help you I hope the information I have provided is helpful.