In the mid to late '90s, a significant portion of my originations was in new construction (NC), and the Federal Housing Administration (FHA) was a very important product for builders. Then the great "value gap" occurred—home values (especially NC) soared well beyond the maximum FHA loan limits. In addition, many builders established affiliate relationships with Mortgage Brokers to benefit from mortgage income. So from about 2000 until just recently, builders pretty well forgot about FHA financing to help them move their inventory.
Now all that has changed. With increased loan amounts, coupled with the loss of sub-prime (which the builders used a lot of), the "builders are back."
This presents loan originators with a golden opportunity to develop new builder relationships, or re-ignite old ones, with FHA financing. This became abundantly clear when, in May of this year, the National Association of Home Builders (NAHB) honored U.S. Department of Housing and Urban Development (HUD) Commissioner Brian Montgomery with The Corletta Award, which pays tribute to individuals who have shown extraordinary creativity and dedication to the cause of affordable housing. Bob Nielsen, NAHB vice president/secretary and a homebuilder from Reno, Nev., was quoted on the NAHB Web site as saying: "Given the current difficulties in the mortgage markets, FHA programs are more important than ever."
So, what does it take to be successful with builders? The answer is that it's not much different than with other referral sources—close their deals! Well, that sounds simple, but the truth is there are some very important differences you need to know when doing FHA loans for builders.
Here are six tips you need to follow to be successful with new construction financing:
1. Know your FHA guidelines
Nearly every loan originator out there right now is telling referral sources that they do FHA. Unfortunately, the majority of loan originators don't understand FHA very well—and you can use this fact to your advantage because you are going to do your homework before you start marketing to builders!
2. Get all of your loans pre-approved
Don't take chances with other peoples' money. You owe it to your client, your builder and your employer to get that loan approved by an underwriter prior to deposit and commencement of construction. You never want to be the one responsible for the deal falling through. If the loan gets rejected in the end, your client can lose their deposit money, the builder has incurred all the costs of construction and nasty lawsuits can result. Getting the loan approved first solves these potential problems, and puts the responsibility on the builder to deliver a new home and on the buyer to maintain their financial status at the time of approval.
3. Qualify at least one percent over the current
By doing this, you allow for an increase in interest rates. Unseasoned loan originators in NC make the mistake of getting the loan approved at the rate they quoted their client in order to get them in the door—and this is a big mistake. I have seen borrowers with great credit get denied at the end of construction because the market tanked, the rates went up and now they can't qualify. Trust me, you don't want to be the one to make that phone call.
4. Use very good application disclosures
Your disclosures should make it crystal clear that:
•The buyer assumes responsibility for maintaining their
financial status at the time of approval;
•Rates are subject to change and may be higher at the completion of the home;
•You offer different lock options, make those options clear;
•They are responsible for providing you with all changes to the original purchase agreement (upgrades, addendums, etc.);
•They are responsible for providing you with cancelled checks and bank statements for all earnest money deposits; and
•No cash deposits are allowed.
By properly disclosing, you make it clear what they are required to do throughout the entire construction period, and you avoid the many unpleasant situations that can arise when things are not made clear at the time of application.
5. Update the file every 90 days
Do not just let the file sit there until the end of the construction period after getting it approved. Doing this will set you up for some unwelcome surprises. By updating the file every 90 days, you can discover potential problems and deal with them before they potentially kill the deal. For example, I remember a loan originator that was working with a married couple purchasing a "new build." In the process of re-verifications, it was discovered that they had both lost their jobs! When the loan originator asked why they didn't inform him, they answered, "We didn't know we had to!" And they thought no one would find out since they were already approved.
Make sure they know from the beginning that they should consult with you before making any significant financial decision. Buyers that I worked with understood this so well that some would call and ask about closing credit cards, balance transfers, etc. New car payments are a potential deal-killer. I have seen plenty of loan originators not make this point clear, only to find that their buyer ran out to get that new car—complete with a $500 payment (they feel rich now, they just got approved for a home loan!)—at which point the loan gets rejected.
Let your buyers know from day one that you will be asking them for updated information throughout the process. Then follow through, keeping the file current by getting updated bank statements, pay stubs, W2s, Verification of Employment forms, etc.
I can't stress enough the importance of making this clear to your buyers from the get-go. Believing (understandably) that, after getting approved, they were done getting documents for you, they will justifiably be more than a little annoyed with you once you start asking for more documentation.
6. Update the builder every 30 days
Call the builders with a 30-day update for each file. For example, if you were referred one loan a week for one month starting on May 1, then on June 1, you will be calling the builder once a week with each loan's 30-day status. Once you've finished the update on week four's file, it's time for the second 30-day update on the week one's file, etc. Call even if there is nothing new to report on the file. This is not only good service, but it is critical for rapport building and for marketing. Every time you call the sales agent, you are branding yourself as someone the builder can trust with their buyers.
Working with builders is very rewarding, and now is the time they need your help. They have been without FHA for so long, they need you to show them how FHA can help them close more sales. Target builders that build homes within your local FHA loan limits, and set-up an appointment to discuss with them how FHA can help them sell more homes. The builders are back. Are you ready?
Jeff Mifsud founded Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a contributor to LoanToolbox.com and is a former FHA underwriter. Jeff may be reached at (877) 342-9100 or e-mail firstname.lastname@example.org.