Financing

Financing Finished Homes

Financing New Start Homes



Understanding Lending for a Completed Home

A few things to know about today’s lending market.

Many lenders have backed off on their willingness to make loans not backed by Freddie Mac or Fannie Mae, (two government entities which purchase loans). Neither Freddie Mac nor Fannie Mae are purchasing jumbo mortgages these days, so it is also becoming more difficult for borrowers to obtain non-conforming or jumbo loans.

What is also true is that small, well capitalized banks who didn’t participate in the sub-prime or other aggressive lending tactics are very much interested in both conforming and non-conforming loans. These privately held, small banks have traditionally had very conservative lending practices and carry their own loans. Since they carry their own loans, it doesn’t really matter to them whether or not the loan paper is readily sold to a third party. They’re not selling. They are filling a niche market by serving highly qualified borrowers.  With qualified borrowers and on the right residential property, loans can be as large as 85% loan to value or higher and have very competitive interest rates and terms.

Locally, Summit Bank is a perfect example of a small, well capitalized bank that offers high LTV loans at rates as low as 6% on non-conforming or jumbo loans. As well, FirstBank has an internal policy of only loaning 50% of their lending quota and investing the other 50% is invested into secure vehicles such as CD’s. This ensures that the bank is very well capitalized and is able to run operations with the oversight but not the interference of FDIC regulators.

Make no mistake. You still need appropriate income to support payments. You still need to have an appropriate credit score demonstrating a qualified credit history. And, you still need to have appropriate down payment. But the Jumbo market for loans is still alive and very healthy. You just need to know where to look for one.

Begin with the loan - not the house.

It is best to start with a one on one conversation with a bank representative to disclose your financial position and fill out a loan application. The bank representative can then tell you the range of home value to consider as well as any criteria that will need to be satisfied prior to closing such as the sale of another property or the retirement of any loans. Then, set out to hunt for your home. Once you find the right home, write a contract that is conditioned upon full loan approval. If the length of time until closing is greater than 60 days, you will need to discuss a lock on interest rate with the bank representative. In many cases, banks will lock as far as 6 months out with prepayment of some fees. Lender requirements will include at least one appraisal – in many cases, I am seeing lenders require a ‘review appraisal’. The review appraisal is simply the review of the first appraisal by a second qualified appraiser to ensure accuracy of the first appraisal.

Once the appraisal is complete and accepted by the bank, and all other conditions to close are met, real estate and loan closing documents can be signed and you become a homeowner. It is really quite that simple.

Understanding Lending for
New Start Design Build Homes

There are a few opportunities to building custom as opposed to buying a ‘Standing Inventory’ home from a financing perspective. Getting financing on a new build is quite different than financing a spec home.

There are three basic strategies of financing the construction of a new home.

Option 1:  Builder Finance
Buyer and Builder sign a Construction Purchase & Sale Agreement prepared by the Builder that outlines the pricing and inclusions for the purchase of the finished home. The Buyer provides earnest money which becomes non-refundable after full loan approval. The earnest money is typically 20 to 25% of the purchase price of the home. Many lenders providing construction loans to builders now require the Buyer sign as Guarantor on the Construction note.  Once the home is fully completed, the Buyer and Seller attend a Closing where the ownership of the finished home is transferred to the Buyer. The Buyer either pays cash or closes on a permanent loan at the same time as this closing.

Disadvantages: If the home is finished before originally estimated, the cost savings on interest carry are retained by the Builder, not passed along to the Buyer

Advantages: The Buyer knows right from the start, what the fixed price of the home will be. The length of time it takes to construct the home doesn’t change the final purchase price.

Option 2: Buyer Carry Construction Financing
The Buyer contracts for the purchase of the lot from the Builder at the same time as executing a General Contractor’s agreement for the subsequent construction of the home after the Buyer takes ownership of the vacant lot. In this case, the Buyer carries the construction loan through the process of the construction of the new home. Once it is completed, the Buyer then closes on a separate permanent loan to close out the construction loan.

Interest rates for Construction loans typically run at prime plus 1% with a floor interest rate of 6% and are calculated at about half the value of the purchase price since interest is applied against only the amount of the loan used at any moment. This option can provide lower interest amounts than in a single time close loan (as outlined below).

Disadvantages:
· If the time period for construction is lengthened, the additional cost is passed along to the Buyer.

·  If interest rates are on the rise and the buyer is unable to obtain a long term lock to ensure lower interest rates, the buyer may find themselves paying considerably higher rates than in a single time close product

Advantages: If the time period for construction is shortened, the interest cost savings is the Buyer’s benefit.

Option 3: Buyer Carry Single Time Close loan
Buyer and Builder sign purchase agreement and General Contractor’s agreement at outset. Buyer carries the loan while construction of the home takes place. Buyer’s single time close loan is a permanent mortgage on the home yet to be built. As such, full mortgage payments are to be paid from the first month after closing the loan.

Disadvantages:
· Can be slightly more expensive in terms of interest paid on the construction of the home.

· Might mean Buyer is paying on two residences at the same time- on being lived in and one under construction.

Advantages:
· From the beginning, buyer is assured of today’s interest rates and knows exactly what the payments will be on the loan.

· The Buyer starts making payments immediately thereby getting a head start on principle payments. 

· Interest paid during construction of the home may be tax- deductable (disclaimer inserted here about not being CPA and you must consult yours).

· Buyer doesn’t run the risk of constructing a home they can no longer qualify to purchase the home since interest rates increased over the course of construction. Buyer knows from Day 1 that this is their home. Don’t have to worry what the financing world is going to look like in 6 or 12 months.

In our era of artificially low interest rates, we are experiencing Buyers opting for the certainty of capturing today’s interest rates and tomorrow’s house. The feedback we hear in our office is that the threat of considerably higher interest rates at the end of construction far offsets the minimal additional cost of the single time close product.  It can be very comforting to know that a permanent loan is securely in place prior to start of construction.