Residential Magazine

Build Your Business from the Ground Up

Construction and renovation loans are an increasingly important part of the market

By Rick Scott

In today’s challenging mortgage market, it is essential for originators to breathe life into their sales figures by focusing on construction-to-permanent and renovation loan programs. With mortgage rates on the rise and remaining volatile, it becomes even more crucial to pursue these two markets.

Selling these programs goes beyond simply highlighting their features. Mortgage companies offer similar products, so the key lies in selling the benefits rather than the features. By helping to build and sell new homes, or refurbish older ones, mortgage originators not only support real estate agents, builders and future homeowners but also reap the benefits of increased business.

Builder enticements

Construction-to-permanent loans feature two distinct phases: the construction phase and the permanent phase, providing borrowers the ability to lock in a long-term interest rate at the time of application. What sets these programs apart is their flexibility.

Borrowers have the option, depending upon the lender, to float their rate (if it’s lower than the rate initially offered) to the current market rate prior to the completion of construction. This means that the permanent rate may differ from the one when the transaction first occurred. This helps to safeguard borrowers against rising interest rates and ensures they benefit from the most favorable market conditions.

Why are these programs so crucial in today’s market? For builders, they offer a range of benefits that can help boost sales, reduce risk and improve cash flow. With construction-to-permanent loans, even if a borrower no longer qualifies at the completion of construction, the builder still receives full payment from the lender. In a market where presold homes are turning into spec homes for various reasons (such as rising interest rates or changes in a borrower’s employment status), these loan programs act as a protective shield for builders, keeping them from being stuck with unsold inventory and saving them from financial losses.

Furthermore, these loan programs improve cash flow for builders. With commercial credit lines becoming more expensive and financial institutions tightening their credit requirements, many builders face challenges in financing their projects. Construction-to-permanent loans can eliminate these hurdles, enabling builders to cover overhead costs and realize profits during the construction phase. By closing the permanent loan upfront, builders are assured of being paid their contract price in full, even in the event of borrower default.

Financial safeguards

Mortgage originators can also reap significant benefits from these loan programs. They can eliminate buyer fallout caused by rising interest rates, loss of employment or changes in credit ratings. This not only safeguards the originator’s commissions but also helps to ensure a smoother transaction for all parties involved.

These loan programs offer flexibility in how builders can use their credit lines. By freeing up credit that was previously tied to construction projects, builders can allocate funds toward company expansion, land acquisition or even the development of spec homes. This newfound freedom allows builders to maximize their growth potential and take advantage of market opportunities.

In addition, these loan programs simplify the builder review and acceptance process. Financial statements and personal credit reports are not required, making it easier for builders to access financing without extensive documentation. Even properties initially intended as spec homes can be seamlessly switched to construction-to-permanent programs upon receiving a buyer’s contract.

Revitalize properties

Another solution that has gained traction in the current real estate climate are renovation loans. These are purchase programs that can give buyers the opportunity to transform a stagnant property into their dream home. These loans allow buyers to see the potential in a property and offer them the option to address outdated features, finish basements, add square footage, or even tear down and build something entirely new.

One big plus for these programs is that they can be used for home improvement projects in conjunction with the purchase of a home, making it an invaluable sales tool for Realtors, regardless of their focus as a sales agent or a listing agent. The median age of homes in the U.S. is 44 years, according to census data. Many of these properties require upgrades, repairs or modernization.

Renovation loans can be used to rejuvenate these tired fixer-uppers that might need more than a fresh coat of paint. Buyers often identify the changes they wish to make but struggle to finance them after the purchase. These loans resolve the issue by providing the necessary funding upfront.

Mortgage originators can close more loans by helping buyers understand that, with a renovation loan, they won’t need to worry about paying out of pocket for the upgrades. The lender bases the loan and downpayment on the total cost or finished value of the property. This means that buyers can combine the cost of renovations with their permanent mortgage, resulting in one loan and one closing. Luxury properties are also eligible for these programs, which do not adhere to conventional loan limits.

Custom preferences

By embracing construction-to-permanent and renovation loans, mortgage professionals can help Realtors increase their sales and reduce buyer fallout that results from the inability to find a house that meets a client’s requirements. For example, if buyers want a finished basement in their new home, they may be limited to listings that already have this feature. A renovation loan allows them to purchase a home with an unfinished basement and have the ability to finish it according to their preferences, with minimal additional cash outlay.

Moreover, these loans can help to shorten the overall house-hunting time frame, which benefits both buyers and Realtors. With less time spent searching for a house that meets all the criteria, Realtors can focus on obtaining more listings or finding additional buyers.

Construction and renovation loans can help to reduce or eliminate buyer-seller negotiations that may arise from home inspections. These typically occur after the sales contract has been finalized, and any issues discovered during the inspection may lead to further negotiations. Even if the seller agrees to make the required repairs, it still takes time for them to obtain bids and complete the work.

In some cases, warranties on repairs may not transfer to the buyer, resulting in additional costs. By utilizing these loans, buyers can include the necessary expenses in their loan, eliminating the need for separate negotiations and streamlining the closing process.

Lastly, these loans provide a financing option for buyers interested in teardown projects. Some buyers may wish to purchase a property with the intention of completely razing it and building a new home. Traditionally, this would require multiple financing transactions. Today, however, buyers can simplify the process by completing all necessary financing with a single loan and closing.


These loan programs are invaluable tools for mortgage originators in the current market. By understanding the benefits they offer to builders, borrowers and yourself, you can differentiate yourself in the market and position yourself for success. ●


  • Rick Scott

    Rick Scott is the director of construction lending for Silverton Mortgage, a position he’s held since 2018. During his 40 years in the mortgage industry, he has headed sales and operations for the construction lending groups at several regional and national mortgage banking companies. Scott was born and raised in Virginia but relocated in 1997 to Atlanta, where he currently lives with his wife of 32 years. Scott has three grown children who also reside in the Atlanta area. Reach Scott at (470) 289-5038.

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