Community Banks are often faced with construction loan requests that are underwritten by Consumer and Commercial Lenders who apply the same .. Read more underwriting standards used for retail and commercial loans to Residential Construction Loans. The problem with this approach is that Construction Lending is a highly specialized form of lending requiring a different approach. It is actually Asset-Based Lending, whereby funds are advanced based on the successful completion of various phases of the project and other requirements being met. Many problems can occur during construction that can leave lenders highly exposed unless they are underwritten properly. Understanding the risks in this type of lending is paramount for bankers. We will examine the characteristics and risks inherent with these borrowers; how to underwrite them and the real estate project under construction. Our primary focus will be on financing the construction of single-family residential housing.
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