New-home sales are on the rise. They jumped 18% on an annual basis and 7.1% month over month this past August, the U.S. Department of Commerce reported. This source of borrowers, if it isn’t already, should represent a significant portion of your mortgage origination business.
Originators who aren’t already in the new-home marketplace need to seriously consider utilizing homebuilder outreach and diversified lending partnerships as part of their 2020 business plans. The figures from this past August are a clear reflection of the robust health of the new-construction market. Buoyed by low mortgage rates and rising household incomes, demand for new homes remains strong.
Despite this demand, however, many builders don’t know or understand the breadth of financing options available to homebuyers. This creates an opportunity for mortgage professionals to educate the marketplace and, in turn, to help builders educate potential homebuyers about the possibility that their next home purchase could be a brand-new home.
Although traditional construction loans come with various risks to both the borrower and builder, the availability and expansion of single-close construction lending — also known as one-time close (OTC) financing — is a game-changer and needs to be in an originator’s toolkit. OTC programs offer a comprehensive financing option that allows the borrower to finance the construction of the home, the lot purchase and/or land payoff, and the permanent mortgage financing with one closing. This saves the borrower time, effort and money.
In addition, OTC programs generally eliminate the borrower’s interest rate risk. Many offer float-down options so that the borrower is protected in the event of a rate increase, while also having the opportunity to lower their costs if rates decrease during the construction period. For the builder, knowing that the borrower has their permanent financing in place should be a compelling incentive for them to participate in these programs.
There is an ever-increasing range of OTC programs available — including those offered by the Federal Housing Administration, U.S. Department of Veterans Affairs and U.S. Department of Agriculture, as well as conventional financing through Fannie Mae and Freddie Mac. With so many options, there is a choice to suit nearly any qualified borrower. And in many cases, the loan has a feature to allow the borrowers to reduce or eliminate any payments during some or all of the construction period.
Many builders don’t know or understand the breadth of financing options available to homebuyers.
By combining OTC and downpayment-assistance programs, the world of homeownership opens up to a broader range of borrowers. This includes clients who may have been months or years away from saving up a traditional downpayment, as well as those who were turned off by traditional construction loans that required two closings and borrower requalification.
Partnering with an OTC lending expert has substantial benefits for everyone, including mortgage brokers, homebuilders and retailers, and Realtors and their clients. With such a wide array of financing options, each with their own eligibility requirements and guidelines, education is key. It is vital to partner with a lender that has a track record of specific experience with OTC programs.
Lean on lenders
Builders will be well-served to form partnerships with mortgage originators and lenders who provide a variety of educational resources and specialized support. There are all kinds of learners, so construction loan expertise must be available digitally via webinars and short video tutorials, as well as interactive tools. You also should ensure the lender has on-call experts who are available via phone or web-based chat.
With specific qualification requirements, timelines and processes that may shift as new regulations affect specialized programs, interactive training needs to be updated regularly and designed in small blocks to enhance retention. Some programs provide the ability to earn certifications for niche programs such as OTC, so consumers know the loan originator is knowledgeable and “certified” to offer these specific loans.
On-demand webinars and other training modalities work well for originators, but frequent interaction and a detailed review of white-label collateral that can be shared with borrowers is often necessary. Builders are busy and their primary focus is building, not financing. To increase your builder business, you must be focused on proving your value as a trusted, educated partner.
You should know whether your lender partners with preapproved builders, and whether they have an in-house ability to approve credit and construction conditions. Dedicated partners may even provide access to project updates such as underwriting progress, needed documentation and rate-lock expirations using a designated builder portal. When working with builders, focus on what benefits them: How do they get paid? When do they get paid? Can an OTC program lower their risk?
Don’t go it alone, however. Get an OTC lender expert on the phone with you. Make in-person visits or send videos about these programs to builders, but don’t rely solely on material they may not have time to read or the financing background to understand. Stay in front of your builders and remain accessible. Builders build homes — and relationships. Support them throughout the process so that together, you can bring more families home.