Construction Loans, just like purchase money and refinance loans are now almost constantly in the news. Latest developments include Countywide’s announcement today that they are pulling out of the construction loan market.
In the recent past companies like National City and Mid County closed their doors on construction loans and some others annunciated very restrictive guidelines an example of which is SunTrust’s announcement yesterday that they will limit their construction loans to a maximum of 70% LTV for all their construction loan programs including fully documented loans.
Unlike purchase money and refinance mortgage loans that are based on present value, construction loans are based on future value and since the so much uncertainty surrounds the future values of real estate, investors prefer to stay away from what only a year ago they considered a very lucrative market.
In general there are very few institutions that still do construction loans, which is proving to be very challenging for the average borrower. We are constantly receiving calls from prospective borrowers who would like to build a new home or substantially remodel their existing home, but almost every one of them is not qualified under the present guidelines.
Wednesday, September 19, 2007
Latest Developments in Construction Lending
Monday, September 17, 2007
What's Nwe in Construction Loans?
For a while back there, it seemed like there was nothing to report on in the world of construction loans, and then all of a sudden hell broke loose!
Construction loan lenders just like all mortgage lenders found themselves in a world of hurt, caused mostly by their own relaxed underwriting guidelines and manipulation of guidelines that encouraged fraud.
Encouraged fraud? You ask, perplexed and confused… Yes indeed, now every CEO of every major lender, who got onto the band wagon and concentrated on closing numbers only and kept manipulating guidelines to facilitate fraud, is looking for an excuse to cover his/her tracks. Everyone is to blame but themselves.
Things have settled somewhat now and I’ll start posting on a more regular basis from now to keep construction loan borrowers informed of the changes that are here and those that are on their way.
Meanwhile, I should mention that our main website, www.constructionloancenter.com is undergoing major changes that will enhance its presence and functionality. I’ll keep you posted.
Things have settled somewhat now and I’ll start posting on a more regular basis from now to keep construction loan borrowers informed of the changes that are here and those that are on their way.
Meanwhile, I should mention that our main website, www.constructionloancenter.com is undergoing major changes that will enhance its presence and functionality. I’ll keep you posted.
Wednesday, July 26, 2006
Don’t Move Up, Get a Construction Loan and Remodel.
Despite the slow down in real estate transactions, it seems that construction loan applications are continuing at a fair pace, though lower in numbers compared with last year.
It seams to me that demand for construction loans will start to improve as people will realize that moving up may be difficult but a major remodel will be a lot cheaper.
With the massive increase in real estate values the real estate taxes have become very large, and while purchasing a new home pegs the buyer at the purchase price for real estate tax purposes in a remodel only case, taxes are typically increased based on the cost of the increased square footage.
For sake of argument let’s take the example of a 1200 square foot California property that was purchased 2 years ago for $350,000 and is now worth $450,000. The tax base is still set at $350,000 and if this homeowner wanted to sell and move up to a 2000 SF property worth $750,000 the new tax rate will be based on that. Assuming a 1.15% average tax rate the new payment will the monthly equivalent of $718.75 which is an increase of $383.33.
If that same homeowner were to do a complete remodel and add 800 SF at a cost of 150,000 then the equity in the house will be increased by some $150,000 or so and the taxes will be increased by about the monthly equivalent of $143.75.
The above calculations are very rough and the prospective borrower should check out the details with their county, but the fact remains that if the overall area will support the new construction’s value then the gain in equity and the real estate tax savings can be substantial.
What’s more is the fact that a construction loan can include the mortgage payments during construction, which will make it possible to temporarily move out of the property.
It seams to me that demand for construction loans will start to improve as people will realize that moving up may be difficult but a major remodel will be a lot cheaper.
With the massive increase in real estate values the real estate taxes have become very large, and while purchasing a new home pegs the buyer at the purchase price for real estate tax purposes in a remodel only case, taxes are typically increased based on the cost of the increased square footage.
For sake of argument let’s take the example of a 1200 square foot California property that was purchased 2 years ago for $350,000 and is now worth $450,000. The tax base is still set at $350,000 and if this homeowner wanted to sell and move up to a 2000 SF property worth $750,000 the new tax rate will be based on that. Assuming a 1.15% average tax rate the new payment will the monthly equivalent of $718.75 which is an increase of $383.33.
If that same homeowner were to do a complete remodel and add 800 SF at a cost of 150,000 then the equity in the house will be increased by some $150,000 or so and the taxes will be increased by about the monthly equivalent of $143.75.
The above calculations are very rough and the prospective borrower should check out the details with their county, but the fact remains that if the overall area will support the new construction’s value then the gain in equity and the real estate tax savings can be substantial.
What’s more is the fact that a construction loan can include the mortgage payments during construction, which will make it possible to temporarily move out of the property.
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