If you are currently building a home or are involved in a real estate construction project, you may need to finance your operations through a construction loan. Builders and home buyers often take out construction loans to cover the costs of a project before obtaining long-term funding — which is considered relatively risky. As a result, Brian Mingham founded CFSI Loan Management, a leading national construction risk mitigation firm. As a high-energy, results-oriented executive with proven experience in all aspects of start-ups and growth, Brian Mingham from Greenwood Village, Colorado wants to share his best tips of ‘dos and don’ts’ in construction lending. From underwriting to evaluating the credit risk of a contractor, he covers everything you need to know before you get started.
Understand Your Level of Risk
First and foremost, Brian Mingham explains that underwriting is the most important part of the construction lending process. Underwriting is the process through which an individual or institution takes on financial risk for a fee. It involves research and assessing the degree of risk each applicant or entity brings to the table before assuming that risk. Brian Mingham explains that when you are underwriting, you have to underwrite the contractor and the project, because if the contractors or the borrowers hiring is not sound, or if the project feasibility and costing analysis is not assessed, you are going to encounter various issues.
Use a Reputable Contractor
Construction lending is fairly risky, and Brian Mingham explains that right now there is a lot more risk to lenders. Contractors can be tough to deal with, and borrowers tend to take the lowest possible bid, which, of course, does not always produce the best results. To try and mitigate some of these risks, Brian suggests evaluating the contractor, making sure they are competent, insured, licensed, and have completed a project of the same size in the past. You will also want to evaluate the credit risk of the contractor. He explains that his business will go back and look at their sales, their financials, how many current projects they have — something that most lenders do not ask the contractor. When a contractor is very light in the bank, they cannot afford a hiccup in construction.
Determine a Budget
Next is the budget. Detail is everything in the scope of work. Detailed scopes of work are critical, especially for the valuation. If you have only nine-line items with very little information about materials, scale, or scope, you could be in for trouble. He suggests getting a construction risk mitigation firm involved from day one. They will talk to your loan officers, explaining the benefits to them, and assess the feasibility of the project. Once you have an approved budget (which your valuation is based on), Brian Mingham’s job as a risk mitigation firm is to manage the budget moving forward.
The Bottom Line
Brian explains that above all else, a construction risk mitigation firm like CFSI will walk through and evaluate everything. CFSI Loan Management are there to keep the contractors honest, because their entire role is to protect the lender.