Finance your Log Home - Reality Check
Log Home Mortgage Reality Check
1. First, I think it is important to know that FUNDING IS AVAILABLE. We’ve surveyed several national bank managers throughout the US and they have indicated that many banks are finding that their local lenders have shifted away from construction lending. Therefore, there is a feeling that banks are not lending on new construction currently. While it is true that many banks are reducing risk in their portfolios by eliminating construction programs, there are certainly many banks that are still offering fair and competitive construction options. More than ever before, you may need to more aggressively look for those lenders that still support new construction lending.
2. It is very important that you understand that borrowers WILL NOT be able to get approved for as large of loans as they could in the past. One of the most important factors that Fannie Mae and Freddie Mac have altered is the maximum debt to income allowance. Moving forward, the maximum total debt allowance will be 45%, based on verifiable taxable income. In the past, the debt ratio could go as high as 60% in some cases, if the credit scores were high and the loan to value was lower than 80% - these compensating factors allowed investors to allow for higher debt to income approvals. Now, as a result of the millions of people that cannot currently afford their payments, the investors have established a more conservative and firm line. How does this impact someone planning to build? For example, a couple with gross earnings of $8,000 per month and current debt obligations of $2,000 a month, would qualify for roughly $50-$80,000 less of a loan amount. Clearly, this will make a HUGE impact on the budgets that you can afford. For this reason, more than ever before, you will want to be sure you pre-qualify for financing as early as possible. Don’t risk your time and effort to find out that you cannot fund the home you are planning.
3. Build up – not down. I have stressed this in the past, but it can never be covered too many times. Finished space (including bedrooms and baths) that are planned for the basement area, regardless of whether it is a walk out, WILL NOT be counted by the appraiser when they look for comps. From my experience, especially in the current housing market, I would recommend that you do not consider home plans with less than three bedrooms and two baths that are all above grade (for those folks needing construction loans). If you are using cash or an equity line to build, they can do anything you desire. However, you will be at risk should you need to sell the property later. For customers needing conventional financing, if a customer needs additional finished space, it is always better to build a second story than finish rooms in a basement.
4. I wanted to again review the current credit score requirements and maximum loan to value allowances. For borrowers with credit scores of 700 or higher, we can currently offer up to 95% financing in most cases (based on the lower of the appraisal or the acquisition cost of the land plus the turnkey build costs) for a new primary residence. For borrowers with credit scores ranging from 660 to 699, the maximum financing is 80%. For second homes, the maximum lending currently allows for 80% (based on the lower of the appraisal or the acquisition cost of the land plus the turnkey build costs).
5. As we are all aware, home values in many areas have been decreasing. As a result, mortgage insurance providers have restricted their issuance for coverage in many areas to mitigate risk. These new “restricted” market lists essentially limit the maximum loan to value to 80% in certain parts of the U.S. To find out if the areas where you sell are affected, go to the website of major mortgage insurer MGIC at http://mgic.com/guides/restrictedmarkets.html. Or, after you meet a customer, plug in their property zip code. The site will let you know whether the market qualifies for standard or restricted mortgage insurance guidelines. These guidelines will change quarterly based on housing sales data. If your area is restricted, you can be mentally prepared that your customers will need 20% down payment from their lot equity or from available cash.
6. A fast moving trend that has occurred over the past 12-18 months is the addition of builder approval requirements to obtain construction lending. As banks consider risk management, especially for new construction, it is not only the borrower that can make a loan go south. While the bank does not have a direct relationship to the chosen GC for the build, indirectly they will want to know that the builder is on relatively solid financial footing. They will also want to see that the GC has a reputation of paying sub-contractors and/or materials providers. As a result, they will be asked to provide financials or tax returns, as well as agree to a credit check as part of the borrowers overall loan approval processing.
7. Finally, one of the biggest changes that will impact our industry is the elimination of Owner Builder or Owner General Contractor loans. One only needs to look to the failure of IndyMac Bank to understand why lenders no longer offer these construction loan options. While the concept of Owner Builder and/or Owner GC seems solid on paper, the statistics for failure to meet original budget or finish within the allowed construction term for these loans are simply overwhelming. Based on our experience, there is roughly a 33% failure rate. As a result, and as stated in the past, American Home Bank has completely discontinued any options for Owner Builder or Owner GC projects. In our current program, the borrower will be allowed to submit a maximum of three separate contracts to establish their turnkey budget and they must have a general contractor of record. As stated above, the GC must meet the banks builder approval requirements.
Labels: home mortgage, log homes, modular log homes, post and beam homes, timber frame homes
posted by New England Cedar Homes @ 7:48 PM
