In this challenging home-purchase market, mortgage originators need all available tools in their toolkit to be able to meet every client’s unique needs and circumstances.
Although the favorable interest rate environment during the first half of the year — including the sharpest one-week decline in rates in a decade — has helped increase purchasing power, being able to afford the “ideal” home is still problematic for many potential buyers. Being well-versed in a variety of loan programs is a good idea for originators in any market, as it will allow you to provide a range of options to your clients and keep business flowing even when traditional purchase loans aren’t in demand.
Renovation loan flexibility
When the perfect property can’t be found, but there are for-sale homes available in the borrower’s desired area, a renovation loan may save the day. This provides a great option for families who love a specific school district, but may be too short on cash to commit to a fixer-upper.
A renovation loan can help stretch their dollars, since the loan-to-value (LTV) ratio is based on the appraised value of the home after the completed renovation. Take, for example, a couple who needed a larger home. Although they initially looked at moving into something more spacious, the right answer for them turned out to be a 203(k) loan from the Federal Housing Administration (FHA), which allowed them to add three bedrooms and two bathrooms to their existing home.
Programs like the FHA 203(k) are a strong alternative to a traditional cash-out refinance because of the ability to calculate the LTV on the “as-completed” value of the home. Similar to the FHA 203(k) are programs such as the Fannie Mae HomeStyle Renovation loan, as well as renovation programs available exclusively to active-duty military, reservists, veterans and surviving spouses.
Another option is a renovation loan with specific guidelines to support buyers in designated rural areas. Financing backed by the U.S. Department of Agriculture (USDA) is not just for farmers, which is a popular misconception. Originators need to educate themselves on the variety of renovation loans available, so they have the tools to help clients obtain financing for properties that may be in need of a little work.
Single-close (or one-time close) loans are valuable tools for the mortgage originator, as they help borrowers and homebuilders alike. Unlike traditional financing for new construction, there is generally no need to requalify the borrower. In addition, the client has certainty of permanent financing since this is determined at the initial close.
In many cases, the financing costs for the construction portion of the loan are lower than what the client would be able to find in a traditional construction or bridge loan. Additionally, the closing costs are reduced since there is only one closing. The real estate agent and originator each receive their commission at the initial close.
And some programs are structured so the client makes no interest or principal payments until they occupy the home. This helps borrowers avoid the potential budget crunch that can occur when they have to make payments on the home they are building, as well as continuing to pay rent or a mortgage on their existing home.
Because the loan is closed before construction begins, the homebuilder can be confident they will receive their construction draws without worrying about a credit or employment event impairing the ability of the client to make payments. One loan, one closing, one payment. The single-close loan is definitely a resource worth tapping.
VA loan simplification
Offering loans from the U.S. Department of Veterans Affairs (VA) is a great way to build your client base. There are more than 2 million active-duty and reserve personnel serving in the U.S. armed forces, as well as 20 million veterans. Nearly all of them are eligible for home loans backed by the VA, which offers competitive rates and is one of the only no-downpayment options available.
The VA offers a variety of mortgage programs. These include more traditional, fully amortizing, fixed-rate loans and one-time close loans that are useful for financing new construction, a lot purchase and a permanent mortgage with a single loan. The VA’s streamline refinancing program, the Interest Rate Reduction Refinancing Loan (IRRRL), allows a borrower to refinance an existing VA loan. There’s also a VA renovation loan that is designed to help a borrower purchase their dream home and make necessary repairs.
Some lenders may be willing to pay any required VA sponsorship fees for originators or correspondent lenders. This can simplify the process and reduce costs for originators to help them succeed with these products.
The key for VA loan originators is to educate yourself, so you are equipped to demystify the loan process and ensure that military families and veterans have access to the best available financing choices. Some VA lenders offer educational opportunities such as seminars, webinars, written materials, and in-person and over-the-phone assistance — which can be helpful for you, your clients and your referral partners.
You may already be familiar with single-close loans and you may even have downpayment-assistance programs in your toolkit, the latter of which can help originators serve borrowers of all income levels. But did you know that, in many cases, these two programs can be combined?
By combining single-close and downpayment-assistance programs, the world of homeownership opens up to a much broader range of borrowers. This includes those 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 or manufactured-housing loans that required two closings and borrower requalification.
About 22 million Americans live in manufactured homes. There is growing demand for this affordable-housing segment and, thanks to modern manufacturing techniques, factory-built homes are often able to deliver higher value than their site-built siblings. For the same price point, the manufactured home will generally sport higher-end features than stick-built homes.
The government-sponsored enterprises have supplemented their manufactured- home financing options with additional programs that, in many cases, qualify the appraisal and the borrower under expanded guidelines. Fannie Mae’s MH Advantage and Freddie Mac’s CHOICEHome programs finance specially designated manufactured homes. These manufactured homes must be titled as real property, meaning the borrower must own both the home and the underlying land. Improved interior features such as drywall, energy-efficient appliances and upgraded cabinets, as well as exterior amenities such as porches and garages, provide validation for the higher-quality craftsmanship evident in manufactured homes in recent years.
The USDA also provides guarantees for its loan programs, which are similar in many ways to FHA programs, but are for homebuyers in designated rural areas and have special underwriting criteria catered to rural communities. The agency’s Single-Family Housing Guaranteed Loan Program, for instance, targets borrowers who wish to construct, renovate or relocate a home in an eligible rural area. This program protects lenders by guaranteeing repayment of 90 percent of the loan amount.
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Originators should seek out resources to learn about specialty loan programs that can help build their business. Again, some wholesale lenders provide free training, in the form of webinars and certification programs, to mortgage originators who do not wish to navigate government-agency websites to get up to speed.
A combination of programs (such as a single-close loan and downpayment assistance for a manufactured-home purchase) can help you serve more borrowers in a wider variety of homebuying scenarios. Your product offerings should resemble an alphabet soup of options, and you need alternatives to conventional loans to build your business.