Home builders branch into home lending «
Wealthy buyers are getting mortgage pitches from an unlikely source: luxury home builders.
Shutterstock.com Before they have even sold a new home to prospective clients, home builders are directing buyers to their financing arms that have been rolling out generous terms on jumbo mortgages over the past year. Perks include longer interest-rate locks, which is the period borrowers can keep the same rate for until they get the loan, and relatively low down-payment requirements.
The push into jumbo lending follows a surge in new-home sales and prices. Nationwide, 402,000 new homes sold during the first 11 months of the year, up 18.2% from the same period a year prior, according to the U.S. Census Bureau. Average prices were up 17.1% in November compared with a year prior.
But sales in the upper-end of the market represent a sliver of this activity. The most expensive homes—those with a sales price of $750,000 or more, according to the Census—accounted for just 5% of all sales during November, up from 2% in the same month last year. Builders say a lack of new-home financing for expensive homes is partly to blame. While affluent buyers could pay all-cash, many don’t want to lock millions of dollars into a home.
To boost sales, builders are jumping into the jumbo-mortgage market.
Builders say financing referrals are intended to streamline the mortgage application process and to remove obstacles that buyers often encounter. Unlike existing homes, which affluent buyers have few problems getting mortgages for, new properties can be difficult to finance. The problem is often with the home rather than the buyer. Lenders routinely look for red flags, like whether the builder’s finances are shaky, or in the case of a new condo, whether too many units remain unsold in that building.
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In contrast, builders’ financing arms have approved the property as have the banks that they refer buyers to. Qualifying applicants should have the loan in about half the time (four to six weeks) than what most lenders would require. And because the builder and lender are connected, they can update each other on factors that may impact the mortgage.
To be sure, after the housing boom, regulators alleged in some cases that close ties between builders and loan officers (among other parties) had resulted in buyers paying more for services. Stephen Melman, director of economic services for the National Association of Home Builders, says those practices have come to an end and that builders are trying to avoid situations where financing unexpectedly falls through.
In today’s market, some builders are rolling out loan features similar to those at regular banks. Last month, TBI Mortgage Co., the financing arm of home builder Toll Brothers, extended its rate lock offer for jumbos to 270 days, up from 120 days. This month, TBI began permitting lower down payments of 10% to 15% (down from a minimum of 20%) for mortgages of up to $1 million, though those borrowers will have to sign up for private mortgage insurance.
Jumbo loans accounted for 19.2% of all TBI’s mortgage originations from January through October, up from 11.2% the same period last year, according to the company.
Stephen Wilson, CFO of London Bay Homes, a luxury home builder in Florida, says roughly 30% of its buyers in Naples, where its home prices start at $1 million, sign up for financing. In Sarasota, it is roughly half. The company alerts buyers to four lenders that it says have deep knowledge of the high-end market in those areas.
At the Ritz-Carlton Residences in Lake Tahoe, where condominiums starting at $1.5 million went on sale this year, four of the 11 units that sold so far were financed, says Stuart Cramer, president of Kennedy Wilson Residential Investments Group, a real-estate firm that is a managing partner for this property. Mr. Cramer says the sales team suggests lenders that can provide financing within 30 days.
With small builders, financing can exist in one-off deals. For instance, RR Builders in New Canaan, Conn., has been trying to unload an 11,000-square-foot six-bedroom mansion since 2009. Managing director Rich Rosano says he began offering a bridge loan for the property, whose price tag is $6.1 million, after potential buyers mentioned they wanted to sell their existing home first so that they wouldn’t have two mortgages simultaneously.
Buyers should consider shopping around for a mortgage before engaging with a builder. Here are other points to consider:
• Higher interest rates : Builders’ financing arms—which tend to pull quotes from regular banks and then sell the loans they originate—may not always offer the lowest rates. Separately, lenders’ affiliates may be less inclined to give the applicant the lowest rate since they don’t have a history with them.
• Financing sources: Buyers should ask builders’ financing arms how many lenders they are pulling quotes from. Some will act like mortgage brokers going to several banks, including small and large lenders, for rates.
• Perks without financing : Buyers should ask builders if they discount their mortgage costs—even if they don’t have a financing arm. Roughly 27% of builders say they offer to pay closing costs and 7% say they will pay points—optional fees paid upfront that lower the loan’s interest rate, according to an October survey of roughly 500 builders conducted by the National Association of Home Builders.