America is building again – a great reason for credit unions to start promoting construction loans.
In April, total U.S. housing starts rose 6.6% to a seasonally adjusted annual rate of nearly 1.17 million, above the revised March estimate of 1.07 million, according to a joint announcement from the U.S. Census Bureau and the Department of Housing and Urban Development.
Single-family housing starts increased 3.3% to a seasonally adjusted annual rate of 778,000 units, and multifamily starts (usually apartment buildings) rose 13.9% to 394,000 units. This renewed demand gives credit unions the confidence to extend financing to more borrowers – something they have been hesitant to do since the housing and commercial construction meltdown before the Great Recession.
Underwriting standards are less stringent for traditional mortgages than they are for construction loans, whose borrowers tend to have above-average credit qualifications and income. The majority of construction borrowers are also prior or existing homeowners.
Construction loan borrowers have, on average, a credit score of 768, 30% DTI, and an LTV of 77%, according to the Census Bureau. On non-construction loans, these average are 736, 33%, and 73%, respectively.
"We've seen a major increase in major home improvement projects that require financing," said Chico Martinez, owner of Martinez Construction in Los Angeles, Calif. "Fortunately for borrowers, local lenders are well-positioned to help navigate the nuances of a construction loan. The average construction loan today is under $400,000 – smaller for major renovation loans. There is not a minimum requirement; however, loans above an industry-standard of $417,000 can mean higher rates, more costs and more restrictive underwriting requirements."
Meanwhile, credit unions such as the West Jordan, Utah Mountain America, with $4.4 billion in assets, offers financing up to 95% OAC; nine- and 12-month construction terms; and 15- and 30-year fixed-rate or 5- and 7-year ARM.
Security Service Federal Credit Union in San Antonio, Texas, with $8 billion in assets, offers to save members up to $5,000 in select closing costs (not including mortgage insurance, seller-paid closing costs, origination fees, discount points or prepaids and reserves).
Another encouraging sign for both credit unions and their members: Single-family permits pulled by homebuilders rose by 1.5% to a rate of 736,000, while multifamily permits jumped 8% to 380,000. A pickup in newly built homes in particular is welcome news for prospective buyers who have been desperately looking for houses in markets with fraught with tight inventories, bidding wars and rising prices.
"This month's modest rise in housing production is consistent with builder sentiment, which has remained steady and in positive territory in recent months," said National Association of Home Builders Chairman Ed Brady in a release.
Adding to Brady's cautious optimism, NAHB chief economist Robert Dietz said the association is anticipating a stronger ramp up of housing construction for the rest of 2016 "given a strengthening job market, low mortgage interest rates and favorable demographics."
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