As Builders Face Bank Fatigue, New Financing Paths Emerge

For homebuilders who depend on bank financing to acquire land, develop lots, and get homes vertical, the past three years have felt like watching the walls slowly close in.

In fact, according to the National Association of Home Builders (NAHB), this past quarter marked the 14th consecutive quarter of tightening credit conditions on land acquisition, development, and construction (AD&C) loans. And with lending standards continuing to ratchet up, the resulting squeeze is becoming existential.

FDIC data reported that 1-4 family construction and land development loan volume dropped 2% year-over-year to $89.8 billion in Q2 2025. While the cost of capital remains historically high—effective interest rates hovering above 12% on both speculative and pre-sold single-family loans—it’s access, not price, that’s becoming the real threat.

Builders are getting turned down not because their deals are flawed,” says Rebel Cole, finance professor and former Federal Reserve economist. “They’re getting turned down because banks simply don’t want to carry the risk on their balance sheets anymore.”

That reluctance, Cole says, is rooted in regulatory pressure, tighter capital reserve requirements, and the lingering risk aversion that’s characterized regional and community banks since early 2023. What it amounts to, however, is a growing number of well-run small-to-mid-sized builders who suddenly find themselves shut out of traditional funding channels.

What Happens When the Banks Say No?

For builders, the pain isn’t theoretical — it’s operational. The latest NAHB survey notes the most common tightening actions: lenders are reducing loan amounts (60%), requiring personal guarantees (53%), hiking rates, or simply not making new loans (47%).

Banks have become unpredictable, inconsistent, and slow,” says Robb Kenyon, CEO of Sound Capital. “That’s not a foundation any builder can grow on.”

Sound Capital, a Seattle-based private lender specializing in residential construction finance, has built its business on the opposite premise: fast decisions, deep builder relationships, and a flexible underwriting model that leans into what banks see as risk — but what Kenyon’s team sees as opportunity.

We don't just write a check,” Kenyon explains. “We visit job sites. We meet subs. We understand the builder's DNA. That’s how we underwrite—through the lens of a partner, not a policy.”

It’s a sharp contrast to what many builders face when walking into a bank: rigid loan committees, sleepless nights spent on personal guarantees, tight covenants, and lending formulas that fail to reflect the nuances of local markets.

From Friction to Fluidity: What Builders Need Now

What’s emerging now among small to mid-sized production homebuilders — especially those focused on attainable price segments — is a deepening split between those with the capital flexibility to act, and those without it. As uncertainty drags on, builders are being forced into high-stakes decisions: protect margins and stall, or sacrifice profits for the chance to build future-ready operations and communities.

In fact, this moment feels eerily familiar. As we wrote here in The Builder’s Daily:

Fifteen years ago, private homebuilders last faced an operating and selling environment this unforgiving… Back then, the housing crash was a single, seismic event. Today, it’s a rolling, uneven grind… For many private operators, their traditional lenders are stepping back from the table just when capital is most needed.”

Those conditions are forcing a strategic pivot among a minority of builders—those who’ve managed to reprogram their land pipelines and product lines around less price-sensitive buyers, while others stay stuck in reactive mode.

I don’t want to sit around and flounder and make no money,” said one private builder executive, quoted in the same piece. “I’d rather use this time to get some good land deals… build a national model that — while it may not be making much money now — is positioned to explode when the market picks back up.”

That logic — trading margin for market positioning — is not academic. It shows up in data from Wolfe Research’s July Private Builder Survey, where orders rose 3.2% month-over-month despite worsening gross margins. Builders are actively absorbing near-zero-profit conditions in exchange for better land basis, leaner construction operations, and a more fluid sales cadence. It’s this kind of strategic repositioning that Sound Capital’s platform is built to support.

The result is that builders are increasingly seeking out financing partners who don’t just approve loans — but support business growth. For many, that means shifting toward private capital, even at a premium.

What a builder values most is reliability,” says Gary Elwood, Executive Vice President and Chief Marketing Officer at Sound Capital. “Can I count on you? Can I move on land? Can I close and start my project? If the answer is yes, the cost becomes less of a barrier.”

Sound Capital’s approach, Elwood says, is structured to deliver exactly that — speed, clarity, and a long-term view that prioritizes the builder’s business goals.

Our model was built with builders in mind,” he adds. “We have provided over $3 billion in funding for builders. That only happens when builders feel you’re on their side.”

While banks may slow-walk approvals or pause lending altogether due to macroeconomic caution, Sound’s underwriting is grounded in real-time local market intelligence.

We’re looking at the dirt, the demand, the execution plan—not just spreadsheets and comps,” says Kenyon.

The Larger Shift: Not Just a Temporary Workaround

To be clear, this isn’t just a momentary workaround in a difficult cycle. Rebel Cole suggests it may represent a structural shift in the financing landscape for small and mid-sized builders.

The next five years could see a rebalancing,” he says. “Private capital—especially institutionalized private lenders with track records — will take a larger share of the residential AD&C market.”

It’s a dynamic born out of necessity, but one that offers upside. While bank credit is constrained and unpredictable, firms like Sound Capital can tailor products to builder needs, ranging from spec construction and presale funding to land acquisition and horizontal development.

And the shift is already visible on the ground. According to NAHB, the volume of residential construction loans outstanding today is 56% lower than the 2008 peak — yet housing demand remains structurally underbuilt.

In that gap, private capital has stepped in.

Future-Forward Lending: Builders, Not Bureaucracy

As the housing industry faces ongoing affordability constraints, supply bottlenecks, and demand-side uncertainty, access to funding—not just the price of it—may determine who survives and who scales.

Kenyon and Elwood both emphasize that their strategy isn’t about taking risk for its own sake, but about aligning with strong operators who understand their markets and can execute reliably.

We ask ourselves: is this a builder who knows what they’re doing?” says Elwood. “If yes, then our job is to be there with the capital so they can move quickly.”

Sound Capital’s growing national footprint — including recent relationships with builders in the Carolinas, Texas, and the Midwest—reflects this strategy.

Our builders are our partners. If we help them grow, we grow too,” says Kenyon.

Looking Ahead: Opportunity in the Gap

With a potential Fed rate cut expected by year-end and demand for new homes still outpacing supply in many markets, builders with funding flexibility are well positioned for the next cycle.

But as Rebel Cole warns, credit access may not recover with rate cuts alone.

What builders need is not just cheaper money—it’s available money. And for now, that’s coming from private lenders.”

For builders strategizing growth, recapitalization, or land pipeline expansion in 2026 and beyond, the choice of lender may be just as important as the cost of capital.

We think like builders because we come from that world,” says Kenyon. “That’s why we’re not afraid to put our money to work in this market.”