While Realtors are not expected to be mortgage experts, there’s no question that the more you know about the homebuying process, the more valuable you are to your clients.
Here are some loans that are unique to the homebuilding process that you can help clients understand:
If your buyers are purchasing a home in a new-home community from a regional or national builder, chances are the financing process will be similar to buying a resale property. Buyers working with a custom builder, a small local builder or who are functioning as their own general contractor will typically need to take out a construction loan, which provides funds for the builder to draw on during construction.
“There’s a limited pool of lenders who provide construction loans because they’re considered riskier than other loans,” says Vic Lombardo, national vice president of retail sales for PHH Mortgage in Naples, Fla. “There’s more risk to the lender because they’re loaning money on something that doesn’t exist yet.”
A.W. Pickel, president and CEO of Leader One Financial mortgage brokerage in Overland Park, Kan., recommends that Realtors identify local banks and credit unions that offer construction loans so they can give their buyers a few options for lenders.
Construction loans are essentially two-part loans that are available with a one-time closing or two closings, says Lombardo.
“The initial loan period, usually for 6 to 12 months, is typically an interest-only loan that the builder can draw on in installments to build the home,” says Lombardo. “If you and the lender opt for a one-time close, that loan automatically converts to a 15- or 30-year loan after the home is built.”
Lombardo says a two-closing construction loan can be better for consumers because they have the option of shopping for the best terms for the second loan. The downside is that the borrowers will have to pay closing costs twice, although he says closing costs are low on the initial loan.
“Even if borrowers pay a little more in closing costs to do two separate loans, hopefully they’ll save enough on the fees and a lower interest rate to offset those costs,” says Lombardo.
Qualifying for a construction loan can be a little harder than for other loans, says Ron Wivagg, national sales support manager for Prosperity Home Mortgage in Chantilly, Va.
“Typically, borrowers need a credit score of at least 680 or higher and will need to make a down payment of at least 10 percent, but often 20 or 25 percent,” says Wivagg.
Lombardo says construction loans also require borrowers to have a lower debt-to-income ratio than other loans because of the possibility of costs rising higher than planned after construction starts.
Loan Options for Newly Built Homes
New homebuyers who are purchasing a home in a planned community from a larger builder can choose between Federal Housing Administration (FHA), Veteran’s Affairs (VA), USDA Rural Housing Development and conventional loans to finance the purchase.
Borrowers who want to make a smaller down payment or who have a credit score under 680 or 700 may find an FHA loan useful because it requires a down payment of 3.5 percent and offers looser credit guidelines.
VA financing doesn’t require a down payment at all, but borrowers must be veterans or currently in the military to qualify for the loan. A guarantee fee is charged to the borrower, but it can be wrapped into the loan balance.
USDA loans don’t require a down payment, but they have income limits and geographical limits, so not all borrowers are eligible for these loans.
First-time buyers may be able to take advantage of loan programs with a 3 percent down payment, but generally conventional loans require a down payment of at least 5 percent and, more commonly, 10 or 20 percent. Borrowers who make a down payment of less than 20 percent will have to pay private mortgage insurance. The lowest interest rates on conventional loans are available to borrowers with a credit score of 740 and above.
Jumbo loans are mortgages for an amount above the loan limits set by Freddie Mac and Fannie Mae. Wivagg says these loans usually require a down payment of at least 10 percent or more, a credit score of 680 or higher and a debt-to-income ratio of 40 to 43 percent or less.
Financing for Repeat Buyers
Buyers who have a home to sell but want to buy their new home first have a couple of options, says Wivagg. One is to purchase the new home with an “80-10-10” loan that includes an 80 percent first mortgage, a 10 percent down payment and a 10 percent home equity line of credit (HELOC). This allows the buyers to make a lower down payment and then pay off the HELOC once their home sells. The buyers have to qualify for the payments on the loans for both homes.
“A bridge loan is also an option, which is a short-term loan based on the equity in the home you own now,” says Wivagg. “The borrowers have to qualify for the payments on their current home, the new home and the bridge loan, but the bridge loan is usually a short interest-only loan.”
Locking in Financing
Pickel says all buyers should get a loan preapproval before looking at homes so they know what they can afford. He suggests that buyers shop around for a loan to compare terms and fees from a builder’s preferred lender, as well as two or three others to make sure they are getting the best possible loan terms.
“Ask each lender about how long they will lock in your rate and what they’ll charge for the rate lock, because while you’re waiting for your home to be built you’ll need a longer lock than you would need on a resale,” says Pickel.
Wivagg says a four- to six-month rate lock could cost half of a point (a point is equal to one percent of the loan amount), but that fee is typically credited back to borrowers at the closing.
Cultivating strong relationships with reliable lenders and understanding the nuances of mortgage financing for newly built homes can strengthen your customer service.