The days of building your dream home from the ground up appear to be in jeopardy.
Lending institutions have become increasingly wary of issuing residential construction loans, even to qualified buyers, as defaults and outstanding loans continue to pile up.
About a sixth of all construction loans were outstanding or on the brink at the end of June, according to bank reports filed with the Federal Deposit Insurance Corporation.
The construction lending delinquency rate rose to 18.2 percent in the third quarter of 2009, nearing the peak of the 2001 recession when the rate hit 19.2 percent, according to a recent Bloomberg story.
Construction home loans are inflicting most of the damage on lenders. But real estate construction loans continue to be a losing proposition for scores of banks. For example, the City National Bank of West Virginia recently announced that its toxic assets mostly consisted of residential construction loans at The Greenbrier Resort.
Instead, banks are increasingly focusing on loans solely for purchasing and refinancing homes. Some have even abandoned residential construction loans all together — both JP Morgan Chase and Citi Mortgage shut down their programs this year.
In other words, the lending pool has thinned considerably for families looking to buy land and build from scratch. Combine that with a considerably tighter credit environment and suddenly the all-American concept of “building your dream home” is on the verge of disappearing.
“These families are not in the same bracket of the builders that have over built subdivisions,” Rick Gomez, owner of San Diego-based Nationwide Construction Loans, said in a recent news release. “These are the families that just want to build the American dream on their own land.
Despite the growing caution, there are still lenders out there willing to take on residential construction loans in this climate. Prospective homeowners looking to secure a residential home loan need to prepare for a potentially turbulent search
To boost their chances of obtaining a loan today, buyers should be prepared on a few key fronts:
Know the story
Construction loans are the epitome of the “story loan.” The lender wants to consider the project background and the prospective borrower’s story before making a decision. If you don’t have a solid, well-crafted story behind the intended purchase, find one
Scour the Internet
Don’t be afraid to include online sources while shopping for lenders. But, as with any potential lender, be sure to investigate their track record and history of working with construction loans.
Check the Credit
It’s shocking how many prospective borrowers fail to reconcile errors and inconsistencies on their credit reports. About one in four credit reports has an error significant enough to quash a loan. This is especially crucial in this current market.
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