As a Realtor, your expertise lies in your local knowledge about homes, neighborhoods and negotiating, not mortgage lending.
However, in order to best serve your customers, it’s essential to know the basics of how your buyers can finance their home purchase too.
While many elements of financing a newly built home are the same as those for a resale purchase, there are a few differences that you can share with your clients. For example, they’ll need to stay qualified for their loan while their home is under construction and they’ll need to qualify for a loan that finances optional features, a preferred lot as well as standard features.
Step One: Lender Consultation
While making sure buyers get preapproved for a loan is always important, it may be even more so when they’re purchasing a newly built home.
“Buyers need to have their expectations set clearly for their maximum loan amount before they look at model homes,” says Mike Kelly, senior vice president of Prospect Mortgage in Ashford, Conn. “As a Realtor, you should make sure buyers understand that if the most they can borrow is $285,000 and they choose a model that costs $280,000 and try to add $20,000 in options, then they may have to reset their expectations or try to find cash to make up the difference. With a resale, what you see is what you get; but that’s not the case with a new home.”
Ron Wivagg, national sales support manager for Prosperity Home Mortgage in Chantilly, Va., says it’s important to make sure that buyers are getting a fully underwritten loan commitment, not just a preapproval.
“The commitment letter from a lender is extremely important to builders because they’re entering a long-term relationship,” says Wivagg. “If a builder is confident of a loan approval, he’ll be more likely to negotiate on options with the buyer.”
Qualifying for a loan for a newly built home may be a little easier than obtaining financing for a resale, says Chris Sanders, sales manager for imortgage in Nashville, Tenn., because lenders who work closely with builders can help marginalized consumers to make the improvements to their credit or their debt-to-income ratio during the period between the purchase agreement and closing.
“Time is on your side when you’re building a new home,” says Sanders. “A good loan officer can get an approval for at least 50 percent of people who have been turned down for a loan by someone else within 90 to 120 days by working on their credit or identifying sources for down payment funds.”
Sanders says builders are sometimes willing to accept marginal buyers because when there is a shortage of homes for sale, they know that they can easily sell the home to someone else if the original buyers fail to keep their financing.
Biggest Challenge: Staying Qualified
Wivagg says the length of time between the initial contract and the closing can work against some borrowers if they aren’t careful to avoid big purchases.
“The new qualified mortgage loan rules make it difficult for lenders to approve a loan for a borrower with a debt-to-income ratio above 43 percent, so Realtors need to tell their clients to avoid charging things to their credit card or financing a new car,” says Wivagg.
The documentation that’s required for a loan is generally only valid for 90 to 120 days, says Kelly, so clients will have to provide updated paystubs and bank statements before the loan closes.
Preferred Lender Programs
Many builders have an in-house affiliated lender or a list of preferred lenders for their buyers to consult. Buyers are typically better off working with those lenders because of their experience in new construction and their relationship with the builder; it’s those attributes that make it more likely that the loan will go to closing. However, buyers should shop around to make sure the mortgage rates and fees are reasonable.
“Even though the preferred lender often offers the best deal, it’s wise to consult at least two other lenders to compare their programs with the one the builder’s lender is offering,” says Wivagg.
Sanders says that preferred lenders typically communicate weekly with the builder and can keep Realtors updated on financing and construction progress.
“Realtors should understand that builders don’t pay lenders to be a preferred lender, they just want a good relationship with a lender and to ensure a smooth closing,” says Sanders.
An experienced lender also understands the potential need for a longer rate lock. “Some lenders will only lock in your interest rate for 90 to 120 days, but new home lenders sometimes will lock in your rate as long as 10 or 12 months depending on the circumstances,” says Wivagg.
Sanders says a loan lock typically costs one-half to one percent of the loan amount, but that fee is refundable or contributed to the down payment at the closing.
“Only about one in seven or eight of new homebuyers takes advantage of a rate lock, but it’s important that they know the option is available, especially if they’re concerned about the monthly payment,” says Sanders.
Timeline for New Home Financing
Buyers need to be prepared to make a deposit when they sign a purchase agreement.
“The deposit varies according to the part of the country where you’re buying and the sales price, so sometimes it’s a flat fee of $2,000 to $3,000 and sometimes it’s as much as a 20 percent deposit for a custom home,” says Kelly. “Most of the time, the buyers won’t need to make any more deposits until they make their down payment at the closing, but sometimes they have to pay for options out of their own funds if they’re putting in more custom features or more expensive choices.”
While mortgage loan details should be left up to borrowers and lenders, Realtors can help potential buyers understand the process of financing a new home.