GSF Mortgage Corp is a Midwest-based lender licensed in 33 states and Washington, D.C. It's brought the single close loan to market out of necessity, said Chad Jampedro, the company's president.
"In many of the markets that we're serving right now, there is limited inventory. Also a lot of the inventory in the market is dated, and we have a new generation of homebuyers that is just not interested in rehabbing a property, or can't get themselves to a place where they can rehab a property," he said. "So we started bolting on the single-close construction product."
While inventory was the main driver of GSF's decision to provide financing for consumers' home construction, the availability of single-close loans and higher loan-to-value ratio limits that allow consumers to make low down payments were as well. LTVs can be far above what borrowers expect. In the case of U.S. Department of Agriculture loans, for example, it's 100%. It can go into the 90s for some of the other loans nonbanks sell to major investors, Jampedro said.
"While, with typical construction lending, you have a bridge loan that rolls into a permanent loan, a one-time close is a more efficient transaction where the borrower is not carrying two house payments. That's important because typically a first-time buyer in particular may have a difficult time managing cash-flow," Jampedro said.
In addition to helping borrowers' manage their cash-flow, the single-close loan also helps lenders offer what can be an attractive alternative to other types of lenders' construction loan products.
"With a more modernized offering, a credit union today, for example, might modify or convert the permanent loan for a small fee such as $500. But with a single-close loan, there is no conversion from the bridge loan to the perm loan one time. It's one-time only. If something happens during the course of a build, it can be a challenge to get into the permanent loan. If you're closing one time, you're saying, 'I don't have to revisit this again.' It eliminates the potential that the loan will not be converted to a permanent one."
But risks that something will go awry with construction, and lenders will be on the hook for it, do exist. GSF addresses these by monitoring its builder counterparties closely with regular reviews and communication.
"As a company we go through builder eligibility. They must have a history of being a builder, paying their bills, and so on and so forth. They need to have agency eligibility, which requires, for example, that the borrower can do none of the work on the property, which makes sense to me."
After initially working with various builders and other lenders as partners to introduce consumer construction lending, GSF eventually found it was a risk best controlled and addressed in-house, with some use of a third-party technology system to process builder draws on the construction portion of the loan, and recruitment of experienced construction lending professionals, Jampedro said.