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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2016

Variety Is the Spice of Success

Construction and renovation products can offer a competitive edge

It is no secret that mortgage originators need to offer a solid foundation of basic programs, including conventional loans as well as government-backed products such as U.S. Department of Agriculture, Federal Housing Administration (FHA), and U.S. Department of Veterans Affairs loans. Imagine these loans as individual building blocks that make up the base of a pyramid.

Even if the foundation is strong, however, originators cannot excel unless they build up expertise in a variety of niche products on top of the base-level loan options. Only then can they reach new heights by catering to a variety of homebuyers.

Because the mortgage industry and the real estate market are both constantly changing, it is vital for mortgage originators to keep up with the desires and needs of their borrowers. Going beyond the status quo of offering ordinary loan programs will be a significant part of an originator’s success, because it makes it possible to serve more homebuyers with unique needs and situations.

Today, many markets around the nation have relatively low housing inventory, and some potential borrowers are missing out on the opportunity to buy an existing home because of low supply and high demand. The solution, for some of them, is to get started on their dream of building a home.

One niche program that is up-and-coming in that arena, for example, is the one-time-close (OTC) construction loan. In many cases, the OTC construction loan can be extremely beneficial for borrowers who are ready to construct their ideal homes from the ground up.

Streamlined process

Part of the appeal of the OTC construction loan is that it streamlines the construction and mortgage-financing process. This type of loan is closed only once, prior to construction beginning, and it covers the costs of the interim construction period as well as providing the permanent mortgage financing.

The loan can be used by two types of eligible homebuyers. The first is a borrower who wants to work with a builder that already owns the lot. The second is a borrower who has purchased the land and has already selected a builder. 

So what’s the bottom line? An OTC construction loan saves the borrower time and money. Because financing is obtained for the construction and permanent loan with one closing, borrowers only need to pay one set of closing costs — as opposed to two sets of closing costs if they choose the two-time-close construction route.

Additionally, the interest rate on an OTC product can be locked in upfront for the permanent phase as well — before the loan closes — which means the borrower is not subject to any interest rate risk during the construction period. At a time such as this, when rates are anticipated to increase over the coming months or year, this can be especially important to savvy borrowers.

Stress reliever

Because the OTC construction loan process is very simple, it’s often a highly preferred loan option for borrowers who want to build their own homes. For the majority of them, the most challenging part of the process has nothing to do with the OTC construction loan itself — but rather is related to making a builder choice and determining all the options they want for their new home.

In essence, by offering an OTC construction loan, a lender is taking much of the stress out of the situation for borrowers, allowing them to focus on the details and design of their new home instead. A loan originator also can work with the borrower throughout the construction process, monitor the work, help the borrower navigate the various steps, and quickly modify the loan upon completion of the construction, if needed.

Borrowers aren’t the only ones who will reap the benefits of an OTC construction loan, however. Originators who can offer this product instantly distinguish themselves from competitors who don’t, which, in turn, allows them to attract more borrowers and close more loans. Loan originators can market this product to potential borrowers to gain an advantage over competitors that do not offer OTC construction loans.

Competitive edge

Overall, to stay competitive, it’s essential for originators to offer niche loan products. In the case of an OTC construction loan, it simplifies the financing for a borrower who wants to build a home. With its streamlined process, a borrower can avoid the hassle of applying for a second loan — and the need to submit qualification and credit documentation again.

Mortgage originators can create a competitive advantage
for themselves by developing expertise in niche products.

Many lenders pulled back from offering OTC construction loans last year when the TRID consumer-disclosure rules went into effect because they were uncertain how to interpret the regulatory guidance for these types of loans. Additionally, many mortgage-document vendors were not able to support these niche loans in the wake of TRID’s implementation — often because they were too busy preparing their systems for the TRID requirements on standard loan programs.

As time has progressed, and additional regulatory guidance has been released, however, many document vendors and lenders have become more comfortable with OTC construction loans. Oftentimes, smaller local banks will now offer this type of financing, but larger lenders are starting to serve this market as well.

Another option

Another loan product that has been picking up steam lately is the FHA 203(k) renovation loan — which is an ideal alternative to a construction loan for some borrowers. This is a beneficial loan option for borrowers who may not desire to build a home from the ground up. Instead, they may have found the right home in the perfect location, but want to “make it their own” through a simple remodel or even a full-scale renovation.

Again, with the high demand and low supply of housing inventory, the FHA 203(k) loan can be a winning option for borrowers in markets where move-in-ready homes are in short supply. One of the most significant benefits of this loan program is that it opens up the possibility for qualified borrowers to move into a desirable neighborhood or town — where there might be a shortage of affordable homes for sale that meet their needs. Borrowers can use this mortgage product to upgrade a subpar home and make it their own by adding elements that reflect their style preferences.

For borrowers who are interested in taking on a fixer-upper project, the FHA 203(k) loan offers a convenient way to finance home improvements. Similar to the OTC construction loan, the FHA 203(k) renovation loan also gives borrowers the convenience of one loan (for the repairs and permanent financing), one closing and one set of closing costs to pay for both the home and the renovations.

Vital offering

Mortgage originators can create a competitive advantage for themselves by developing expertise in niche products such as OTC construction and FHA 203(k) renovation loans. Not only can these loan products give originators an edge in the market, but they also expand the range and variety of borrowers served by appealing to those whose needs don’t fit the mold of a conventional mortgage option.

What’s more, there are many borrowers who want and need these products in order to achieve their specific homeownership goals. For those who want to build a home, for example, if there is no lender financing available, the homebuyer will have to pay cash or work with a builder that provides financing — and neither of these options is a very realistic course for most homebuyers or builders.

In terms of the renovation loans, these are necessary for many reasons as well. Absent a viable source of financing for houses needing renovation work, such homes likely will sit vacant for long periods of time. Renovation loans, such as the FHA 203(k), address this problem and also can improve neighborhoods by making financing available to eligible borrowers who want to fix up homes that are eyesores in the community.

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As mortgage originators look to the future, product variety will be an essential part of their profitability, as well as their ability to serve as many home-buyers as possible. If you are still working with only the basic building blocks of standard loan, consider adding niche products, such as construction or renovation loans, to boost your success.


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