Material Costs Continue to Rise – Learn the Latest Strategies Lenders Can Use to Protect Themselves
As demand for new construction rises, material costs are rising too. As a lender, you want to be protected from the impact of this – but how? Keep reading to learn some of the strategies that could save you big in the long run. If you want unique construction collaboration strategies, contact ECL Software at 800-625-5972, and we will be happy to provide a free demo of our groundbreaking software.
Add a Contingency Reserve Account Contingency
It can be wise to require that a borrower’s contingency reserved is financed directly into their loan. This requires the borrower to qualify for the increase in the cost of the build – as well as the home they might need to appraise higher. However, the advantage could result in enough cushion to reduce the financial burden on the homeowner in the event that costs continue to increase.
We recommend hiding the borrower contingency from the homebuilder and only using it to cover cost overages that the borrower is required to play. You might need to take a look at the construction loan agreement to check on contingency reserves being contemplated.
Utilize Builder Acknowledgement Forms
These are documents that are executed before the construction loan closes and is used to make sure that every party is on the same page before construction starts. With the importance of construction collaboration, we cannot stress enough just how important this step can be.
The form can acknowledge every covenant that is applicable to the borrower in the loan agreement they sign. This could include the process for drawing and changing, inspecting, and cost overage handling. This form should be created using simple language and should be written to supersede any other agreements that exist between the builder and the borrower.
Why is this wise? For two reasons. First, it confirms that the builder understands the specific obligations the borrower has to the lender. Second, it speeds up the process of reviewing contracts while still helping to prevent hidden convents that could cause problems that affect the project’s completion, such as increasing material costs.
Take Another Look at Your Change Order Policy
When was the last time you looked at your internal policies and loan agreements? Now is a good time to make sure that they have a clause for lender approval of any and all change orders. Builders might look at change orders to keep everyone on the same page, but they could also use them to sell upgrades and get more revenue.
When you work with ECL Software, you can count on the latest in software solutions. Contact us now at 800-625-5972 if you would like to request a free demo or get answers to any questions you have.
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