Construction Finance Risk: Understanding the Basics
Risk. If there’s one word to describe construction finance, it’s this.
Construction finance risk has stopped many lenders from taking the leap into the construction lending space. But by avoiding construction financing completely, lenders are missing out on the potential profits construction loans can offer. Here’s a complete guide to the risks associated with construction finance, historically and at the present.
Historical Construction Finance Risk
Dramatic swings in the real estate market in the last decade have made construction finance a difficult and risky business to be in. In order for lenders to maintain profits, they have to keep up with the changes in the broader real estate lending arena. But construction finance is much more involved than standard real estate loans, so keeping profits up through an ever-changing market can present a real challenge.
Much of the construction finance risk comes from the loan administration process. Historically, it’s been one dictated by manual entries, excessive paperwork, due diligence, and oversight by multiple parties. And the more people involved in the administration of a single loan, the more potential there is for mistakes.
Construction Finance Risk Management
Despite the rocky history of construction finance, it’s a much-needed industry, and there are modern solutions that can help mitigate the associated risks. But why take on the risk at all? It’s simple, really. The U.S. is facing a major housing shortage, especially of affordable homes. Across the nation in early 2021, nearly 65% of homes sold were affordable only to buyers making close to $80,000 [National Association of Home Builders]. Construction finance is essential to building enough affordable housing for buyers nationwide, and it’s crucial that more lenders open up to the idea of adding construction lending to their portfolio.
So how can lenders offer construction finance without all the risk? Modern construction finance software has taken major strides toward mitigating and managing the risks associated with construction lending. Unlike the historically complex and difficult to manage construction loans, the right technology makes them easy to manage and far less risky. Here’s how it works:
- Real-time at-a-glance numbers on every construction loan increases transparency and helps prevent fraud.
- A digital, cloud-based system makes for a smoother draw process. A sped-up payment timeline causes interest to accrue more quickly, leading to increased profitability of construction loans.
- Automated processes mean less manual data entries and fewer hands-on each construction loan, both of which reduce the risk of errors and increase the number of loans each loan administrator can manage. This is how construction finance technology is reducing risk and increasing the profitability of construction loans.
CoFi is Here
There will always be construction finance risk, but CoFi is here to help manage and mitigate that risk and bring profitability and stability to construction lending. Our unique construction finance management software is tailored to both lenders and contractors, streamlining the process and reducing the inefficiencies that used to exist in the world of construction finance. See how CoFi can help your business. Get your personalized demo today!