Laying the foundation for construction loans: 3 benefits for servicers when borrowers choose “build” over “buy”

Today’s house-hunting environment is unlike anything buyers have seen in decades. Inventory is low, competition is high, and in a market that skews this strongly in a seller’s favor, would-be buyers often settle for “getting into any house” instead of “getting into a house they want.”

The scarce inventory is driven in part by current homeowners who previously locked in mortgages at record low rates, and now aren’t keen to double their monthly payments to upgrade to a new home. This has left markets incredibly competitive, and an increasing number of would-be homeowners are opting not to compete in the crowded market – and are building their homes instead.

This opens new opportunities for organizations who are prepared to service construction loans, because by the time a borrower comes looking for a construction loan, it’s already too late to make sure your technology and your team are up to the job.

Here are three benefits for servicers who are ready to act quickly when buyers choose “build” over “buy.”

Construction loans can lead to borrower retention

In a low-movement market, construction loans can be a way for servicers to grow their portfolio. The key to opening an even greater opportunity for revenue is to deliver the type of experience that makes them want to keep you as their servicer long after their home is fully built.

Teams that are equipped to service construction loans are in a prime position to retain customers who choose to build instead of buy because of one major factor: once the construction is complete, the construction loan can be rolled over into a regular mortgage. Construction loans are the perfect point of first contact between servicers and borrowers. And although construction loans are typically paid off faster than a typical mortgage, this is a prime opportunity to make a new customer for life.

The blueprint is simple: if your servicing technology can seamlessly transition one loan type into the next with no interruption to your borrowers, their satisfaction increases and they’re less likely to shop around for a new servicer. That means any time a borrower builds a home, it’s a chance for you to build a long-lasting relationship.

Construction loans are less prone to default

It’s an unavoidable reality that default is always possible on any loan. But construction loans tend to be more resilient and less prone to default than typical mortgages. There are three reasons this is the case.

1. The borrower is working within their own budget right out of the gate. The customer has priced everything out according to their own financial situation before the first brick is even laid.
2. The borrower is far less likely to run into unexpected expenses that can lurk in existing homes — black mold that somehow didn’t make the seller’s disclosure, a crumbling foundation hidden behind wood paneling, a failing roof, or an oil tank buried on the property that demands remediation in the tens of thousands of dollars. Any of these can leave borrowers facing unexpected financial difficulties and can make defaulting on the loan more likely.
3. The length of time it can take to build a new home can make interest rates work in the borrower’s favor. On average, borrowers can expect a new build to take anywhere from seven months to a year. During that time, interest rates will naturally fluctuate. And since construction loans can be rolled into a typical mortgage at any time, borrowers have the ability to lock in rates if they drop, which means servicers add a new customer to their portfolio — one who’s at lower risk for default since they locked in a rate that works for them.