How to Streamline Construction Lending

The construction industry is uncertain, and lenders are left to do what they can to approve more construction loans, gain leverage with complex borrowers, and ensure their projects get completed regardless of defaults.

FREMONT, CA: Increasing material prices, supply chain delays, and construction labor shortages contribute to today's economic uncertainty. Borrowers are ultimately supposed to foot the bill for a project, but lenders take on the majority of risks as they provide the funding. Interest rates on construction loans are higher because lenders take on more risk. In construction, almost every risk equates to significantly increased costs: delays translate into extended general conditions, material shortages translate into higher prices, and competition for labor forces means higher wages.

How does an increase in construction costs affect the project?

Borrowers often bear the burden of increases because the lender caps their loan. Borrowers may push back on lenders when costs exceed their budget. A lender is then forced to choose between approving a larger loan amount or risking default if the borrower is unwilling to pay more. When a loan defaults mid-construction, the property is worth less than the land alone. A receiver is appointed and foreclosed on, or at least that usually happens. Lenders can gain leverage over difficult borrowers today. When a borrower defaults, the lender acts as the beneficiary by the project completion insurance they purchased. The bond is usually cheaper than most sureties and easy to fund.