March 25, 2021

Five Keys to Originating More Construction-to-Permanent Loans

Issues Facing Originators

With the inventory of houses for sale approaching historic lows, more and more homebuyers turn to new construction — avoiding the bidding wars that are a fixture of the current market.

There were 1.04 million homes for sale at the end of January, a 26% drop from a year ago, according to the National Association of Realtors®. In December and January, available homes for sale slipped to a 1.9-month supply, the lowest since the Realtors’ data analysts began tracking the measurement in 1982.

Sales of newly constructed homes shot up by 18.8% in 2020 — hitting the highest level in a decade, the U.S. Commerce Department reported in December.

Months’ Supply of Existing Homes for Sale. Click to enlarge.

Construction-to-permanent mortgage loans — often called C2P loans — represent a small but growing segment of the new home market. With so few existing homes for sale, more prospective homebuyers will be considering C2P loans in the months ahead to build a custom home from scratch on a chosen lot using contractors they pick.

Construction-to-permanent is an attractive option in the current market because it enables families to ensure their new home is built to their specifications. In the wake of COVID-19, they can include hard-to-find amenities like his and hers offices, a child study area and space for gym equipment.

Here are five things loan originators can do to maximize opportunities with C2P borrowers:

  1. Build your knowledge and let your referral network know you can be a resource on construction-to-permanent loans. Referrals from builders and real estate agents are crucial since they’re often the first to suggest C2P loans to prospective homebuyers, who often have little knowledge of financing options for newly built homes.
  2. Actively promote C2P as an option on your social media accounts once you’ve gained some experience. Since so few borrowers searching for a home have experience with new construction, a quote (and a photo) from a satisfied homebuyer can be enormously influential in attracting new borrowers and referrals.
  3. Sell the benefits to builders: Typically, a builder’s construction capacity is limited by the amount of credit a lender will extend. Because homebuyers apply for C2P loans, builders may be able to expand the number of homes they’re working on simultaneously — boosting the contractor’s bottom line during a period of high demand.
  4. Set the borrower’s expectations in your first meeting. New construction involves expenses your homebuyer needs to know about — including fees for inspections, loan administration and title updates. Fully discuss these in advance to avoid any surprises once the building project is underway.
  5. Offer the convenience of multiple options. Arch MI’s construction-to-perm products provide the right mortgage insurance (MI) coverage for primary and second homes. Borrowers can choose between initiating coverage at the initial closing or upon conversion to a permanent loan. In addition, eligible borrowers can prepay up to 12 months of MI premium in advance for single-close loans — requiring less money up front than single premium MI on loans that are typically refinanced within a short period.

As C2P loans attract more attention, it’s likely the Insights blog will return to this topic, and we’d love to have your feedback. Share the experiences you’ve had with C2P buyers and the building community by sending us an email about what worked for you and any challenges you experienced. We look forward to hearing from you.