Magazine article Mortgage Banking

Builder Business: A Great Opportunity to 'Make It Easy'

Magazine article Mortgage Banking

Builder Business: A Great Opportunity to 'Make It Easy'

Article excerpt

In 2005, about $275 billion in loans were originated to finance newly constructed homes. Two-thirds of this business required permanent take-out loans because the builder carried the financing during construction. About one-third of that involved construction-to-permanent (CTP) financing.

New-home construction has traditionally been a stable origination market because builders must sell homes. It's their core business, and they have the flexibility to adjust square footage, lot size, amenities and financing incentives to move units. Mortgage bankers can help builders add a variety of financing and affordability options to their arsenal of new-home selling tools.

There are many new challenges facing builders (and homeowners) in the current market: higher rates, flat yield curve, higher resale inventories, slower absorption and expensive land. Mortgage bankers can help builders with these challenges, and build long-term relationships in the process.

Make it easy for borrowers to buy, afford and enjoy the home of their dreams with safe and predictable loan choices

Help the builder structure sales incentives (2 percent to 4 percent of the selling price on specific homes) that help sell homes. Use the incentive to guarantee a specific payment to the potential buyer based on a specific cash-down payment using the incentive as a rate buy-down or for closing costs. Or, package the financing to cover all lender fees and title costs as a one-fee closing package. While the buyer may decide to structure a different package, the mortgage banker has helped the builder market and control how to present his or her product most favorably. Extended rate locks are also good uses of incentive dollars.

Make it easy to buy a new home when the customer has a home to sell

There are really two issues at work here: first, getting the equity out of the old home if it is not sold before the new home closes; and second, dealing with two mortgage payments from both a qualification and buyer's-anxiety standpoint.

Freeing up the equity in the old home can be done with a swing or bridge loan. If there is sufficient equity, the swing loan can be structured to capitalize the interest for a period of time.

Qualification and anxiety issues are a little harder to solve, particularly when the old home is not under an agreement of sale. The mortgage banker may help the builder structure an agreement for the builder to make the payments on the old mortgage after closing on the new home until the old home is sold. The builder may also negotiate with a real estate agent to provide a "guaranteed home-purchase program." The key here is for the mortgage banker to help the builder discover new ways to sell homes.

In cases where a builder requires the buyer to provide construction financing, the buyer can still break ground on his or her new home even if the old home has not sold yet. Offer a "no-interest-payments-during-construction" CTP loan, wherein construction interest is capitalized. This lets the borrower break ground on a new home before selling the old home.

Make it easy for builders to optimize their spec line of credit usage with CTP products.

Mortgage bankers can offer flexible CTP mortgages to help builders manage their bank lines of credit. There are a number of CTP lenders that allow the builder to customize draw schedules, contractually direct the draw payments directly to the builder, and capitalize construction interest. The CTP programs frequently have rate cap and float-down options that provide payment protection to the borrower. …

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