By aligning payment structures with factory realities, some financiers are unlocking projects that traditional banks won’t touch.
• Traditional banks hesitate to fund modular projects because they can’t assess offsite work as secure collateral.
• Experienced modular lenders like CalCon and Union Homes bridge the gap with process knowledge and flexible risk evaluation.
• Developers will improve approval odds by choosing the right lender, showing experience and joining offsite industry networks.
Developers pursuing modular and other forms of offsite construction often face a frustrating obstacle: some traditional lenders don’t understand how the process works and view these projects as too risky to fund.
Thomas Coronato is deeply familiar with the challenges and misconceptions surrounding offsite financing, having spent nearly three decades in modular lending. He is Senior Vice President of Construction Lending at CalCon Mutual Mortgage (CalCon), which is headquartered in San Diego, California. He’s also the chairman of the National Association of Home Builders’ Building Systems Council.
Why Banks Say No
Coronato says the biggest hurdle developers face is a lack of education about modular. “Most people — senior bank executives, appraisers, realtors and your neighbors — still confuse modular homes with manufactured housing,” he explains. “They hear that a modular home will be going up nearby and they picture a double-wide trailer.”
That misunderstanding extends throughout the lending process. Because modular construction happens offsite, it doesn’t fit neatly into the systems that banks traditionally use to evaluate and fund projects. “Banks are used to lending on work that’s already in place on the site,” Coronato says. “In modular, manufacturers usually require full payment before the home leaves the factory.”
To a conventional lender, that can seem risky. “Their first reaction is that the house isn’t attached to the land yet — so it’s not secured collateral,” he explains. “That can make banks nervous.”
Coronato says that until banks become better educated about offsite construction, developers will continue to face this challenge. “It’s not that modular is risky,” he says. “It’s that the banks don’t know how to evaluate the risk correctly.”
Risk and Cash Flow Timing
In modular construction, the timing of payments and risk distribution differ from site-built projects. Coronato explains that a typical site-built loan involves a predictable draw schedule — perhaps 20%, 20%, 25%, 25% and 10% as the project progresses. Each draw is approved based on work that has been completed and inspected on-site.
Modular projects don’t follow the same rhythm. Manufacturers need to buy materials upfront, so “they usually take a deposit to start, and then they want to be paid in full before shipping,” Coronato says. “That can mean 30% to 50% of the total project cost goes out before the home reaches the site.”
This mismatch is what creates tension between banks and developers. “The modular manufacturer is grabbing procurement money for materials, but the bank wants to lend only on what’s already on the property,” he says.
Coronato emphasizes that risk exists in any construction project.
“A site builder could take a draw and disappear, too,” he says. “But banks are more comfortable because they can see the work.”
Lenders who understand offsite construction, however, know that modular projects can actually reduce risk overall. “Time is the enemy in construction,” Coronato says. The longer a project takes, the longer the lender is exposed to risk. “With modular, you shorten build time, which reduces risk.”
He also points out that stickbuilding involves more people: multiple subcontractors and multiple trades. Because there are fewer people and entities involved in a modular project, there is less exposure to risk.
How Specialized Lenders Work
CalCon is willing to fund offsite construction before delivery of the homes, but that willingness comes from experience and understanding, not recklessness. “We make smart decisions, not super-risky ones,” Coronato says. “We vet the manufacturer, the borrower [either a small developer or a homeowner] and the general contractor before approving the deal.”
Yana Billet is the National Sales Manager (Systems Built) at Union Homes Mortgage, which is headquartered in Strongsville, Ohio. She specializes in construction loans to homeowners rather than developers, but she agrees that lending in the offsite industry depends on understanding the offsite construction process. “You need to know how the payments are structured and be comfortable with that,” she says. “As a mortgage lender that specializes in systems-built housing, we’re familiar with the number of draws and deposits different parts of the transaction require.”
In addition to understanding how the offsite construction process works, her company also does its homework, looking into each case individually.
“Even though the construction loan is for the customer, we look at how long the builder has been in business, how many projects they’ve completed, and whether they have the right insurance,” she says. “We’re active in associations like the Modular Home Builders Association and the National Association of Home Builders, so we know the builders and factories we’re working with. Those relationships help us manage risk.”
In contrast to evaluating risk on a case-by-case basis, Coronato explains that traditional banks typically impose “overlays,” or extra restrictions beyond standard loan program guidelines to modular projects. Coronato’s team doesn’t add these restrictions. “We use common sense,” he says. “If the borrower has equity, the builder has a track record and the manufacturer is stable, we’ll find a way.”
He recalls recently approving a borrower with a 580 credit score. “Technically that’s low, and a computer with overlays would say no,” he says. But, Coronato explains, not all 580 credit scores are the same. “Is it a good 580 or a bad 580?” he jokes. Maybe a low credit score is because the borrower is carrying a lot of debt or because they’ve missed some payments or maybe it’s just because they’re new to credit.
He says that each case needs to be evaluated on its own merits. If the borrower has strong equity and low overall debt, if they haven’t paid anything late, and if they make a lot of money but are just new to the credit game, CalCon is likely to say yes “because it makes sense.”
It doesn’t mean that a client with a 580 credit score gets the same credit offer as a person with a 780 credit score. “They do not, because they haven’t earned that,” says Coranato. But they do get an offer, “which means a home will be constructed that wouldn’t otherwise get built, because this client was getting a string of nos from banks.”
For Coronato, modular lending is worth embracing and many banks are missing out. “There are riches in niches,” he says. “Offsite is the future of construction, whether people realize it or not.”
How Developers Can Improve Their Chances
Developers who want to secure financing for modular or offsite projects can take several practical steps to raise the odds:
• Find the right lending partner. Many banks still won’t finance modular construction. “If your lender doesn’t do pre-curbside delivery payments, that’s a deal-killer. They’re not in modular,” Coronato says. “Find one who is.” They are out there, but you may need to look beyond traditional banks.
• Show your experience. Even if you’re new to modular, demonstrate your building or project management background. “We look for construction experience,” he says. “If you’ ve been doing site-built projects for 15 years, that still counts.”
• Leverage the manufacturer’s expertise. “Modular manufacturers are great at helping first-time modular builders,” Coronato says. “They’ll help you because they don’t want you to fail either. There’s so much room for growth and growing the industry helps everyone.”
• Join industry groups. Coronato encourages developers to get involved with organizations like the Modular Home Builders Association or NAHB’s Building Systems Council. “You’ll meet people who’ve done it before and are willing to share what they’ve learned,” he says.
Finding a Way Forward
Coronato recalls a project in Connecticut where a manufacturer faced a serious cash-flow gap. The factory had $3 million worth of modular components ready to ship to the site, but the developer’s local bank refused to release funds until all units were set and inspected — a process that would take ten days. “The developer called the manufacturer in a panic. The manufacturer knew and trusted me and said he thought I’d have some tricks up my sleeve.”
Coronato was able to find a solution. “We stepped in,” he says. “As each set of boxes left the factory, we paid in small increments. We held a short-term note for ten days to bridge the gap.”
That temporary funding kept the project moving and avoided costly delays. “It wasn’t overly risky,” Coronato says. “It was a smart risk. We knew both parties, and it made sense.”
He points out that many financing challenges could be resolved with cooperation and communication. “The local lender simply didn’t understand modular so they were overly cautious.”
Coronato believes that as more lenders come to understand the benefits and risks involved with offsite construction, more of them will make loans available to developers. The key is education.
As a start, perhaps take a copy of this article to show your local bank manager.
Zena Ryder writes about construction and robotics for businesses, magazines, and websites. Find her at zenafreelancewriter.com.
