New Home 101: Shopping for Your New Home, Part 2

On one side is information on how to about getting a loan. To the left-hand side of the picture is a geometrical representation of a home.

When shopping for your new home, financial matters should always be at the forefront. Here are some tips for working with a lender and your mortgage.

This article is the second part of a three-part series discussing how to shop for your new home. For part one, click here. For part three, click here.

Schedule a Lender Consultation

You should already have a general idea of your comfort level with your housing budget, but now it’s time to get serious about arranging financing for your new home. If you’re a first-time buyer, you should expect to spend an hour or more with a lender learning about loan programs and discussing your finances. If you already own a home and are buying your first newly built home, you may already have your financial plan in place and a loan program identified.

Your financing options are different depending on whether you’re working with a production builder or a custom home builder. Financing a newly built production home is in many ways similar to financing the purchase of an existing home except that you may need to wait until your home is closer to completion to lock-in your loan and interest rates. If you’re buying a quick delivery home that you’ll purchase and move into within 30 to 60 days, your financing process will be the same as if you were purchasing a resale property.

Most large and midsize builders have either an in-house or affiliated lender or a list of preferred lenders that buyers can work with to arrange financing. As a buyer, you have the choice of working with the builder’s lender or arranging a loan with a different lender. In many cases, your builder will offer incentives such as closing cost assistance or provide one or more free options if you opt to use the preferred lender and settlement company.

Whether or not you use a builder’s preferred lender, it’s important to use a lender who’s experienced with the home building process, says Phyllis Casillas, a sales manager for On Q Financial, Inc. in Tempe, Arizona.

“The major difference between financing a newly built home and a resale is that when you’re buying a new home, you have to wait to secure your interest rate,” Casillas says. “When you’re buying a resale, you usually can lock in your rate as soon as you have a contract.”

An experienced new home lender can give you advice about when you should lock in your rate and help you find the right loan to meet your needs.

“You have a window of unknown on rates, so don’t wait to be surprised,” she suggests. “For instance, if rates are 4.5 percent vs. 5.5 percent, ask the lender what the difference in payment would be and whether you qualify at the higher rate.”

Production builders have recommended lenders or in-house lenders because they want to make sure that the buyer’s financing is secure and in place when the home is finished. During the construction process, the financial outlay, and therefore all of the risk, is taken on by the builder (other than your deposit), so it’s natural for a builder to be particularly concerned that you’re able to purchase the home. If your financing were to fall through, the builder would be forced to put a home on the market that has been designed to your specifications. It can be difficult to sell a home that’s been completed in a new development since most buyers in new communities are excited to be able to personalize their own home.

“It’s smart to work with a lender who’s recommended by your builder because these lenders are familiar with the community and will help make sure you get to the closing,” says Caryl Dierksen, a homebuyer in an Epcon Community in Woodstock, Illinois. “I know some people who used a different lender and had a lot more trouble, especially because they were working with an out-of-town lender, not a local one.”

Working with the builder’s recommended lender could be beneficial to you in several ways. Not only does this give you the advantage of access to builder incentives, but the application process could be faster and simpler since the lender wants to satisfy the builder as well as provide you with financing. You also know for certain that you’re working with a lender who’s experienced with new home financing and comes recommended by your builder. The lender then becomes part of the team of people working to get your new home built and financed to meet your needs.

However, you should also shop around to make sure that the rates and fees you’re quoted and the loan programs that are available to you are similar to those available from other lenders. Compare the interest rates and the cost of the loan from the builder’s lender (or recommended lender) with those from one or two outside lenders. If the interest rate you’re offered by the builder’s lender is higher, you need to weigh the financial benefits offered by the builder (such as closing costs or upgrades to your home) against the additional interest payments you would make over the life of the loan. In most cases, the preferred or affiliated lenders recommended to you by your builder will offer competitive financing, but it’s wise to spend a little time shopping around to be certain.

If your builder doesn’t have an in-house lender or you simply want to shop around before committing to a lender, plan to interview two or three lenders. It’s important to find a lender you can trust. After all, you’re providing access to your deepest financial secrets, so you need to be comfortable sharing your money habits and willing to develop a relationship with your lender. The best way to find a lender is to ask for recommendations from your builder, a real estate agent, and from your friends or colleagues who have recently bought a home. You can also start with your bank or credit union to consult with a lender or contact a community bank.

Mortgage Loan Qualifications

The essential elements of qualifying for a loan, including a review of your credit history, job history, income and assets, are the same regardless of whether you’re applying for a mortgage to build a home from a production builder or to buy an existing home. When you’re shopping for a home, regardless of whether you’re looking for a new home or a resale, it’s best to consult a lender and get prequalified or even preapproved for a loan. A prequalification for a mortgage is based on your verbal statements about your income, assets, debts and credit score, although many lenders will also do a quick credit check as well. A preapproval requires you to provide documentation to a lender.

“You should go through the loan application process and get preapproved for a loan,” PenFed Credit Union’s Craig Olson says, “but you’re not obligated at all to actually finance your home with that particular lender. A preapproval letter is a promise to provide financing based on an applicant’s documented information, but it’s contingent on the borrower actually finding and making an offer on a property. You can switch to a different lender when you’re ready to buy, although you’ll have to provide complete documentation to that new lender.”

When you’re shopping for a resale home, sellers typically refuse to accept an offer from a buyer who lacks mortgage preapproval. The strength of your loan preapproval is particularly important if you’re competing against other buyers for a property. If you’re buying a new home, a mortgage approval should function as a check-up to make sure your finances are in order and as a way to establish your price range.

“A mortgage preapproval determines how much you can spend not only on the home itself but also on the optional features you want,” says Mike Kelly, senior vice president for Prospect Mortgage. “Your lender will determine the maximum amount you can borrow and then you’ll discuss your available assets for the down payment and closing costs to determine your total sales price. For instance, if you qualify for a $300,000 loan and you have $30,000 in cash for the down payment then you can only spend up to $330,000 on the base price and all the options. It’s smart to do this before you look at options so you don’t sign a contract for $350,000 including options and then have to reset your expectations for what you can afford to add to your home.”

Mortgage lenders will evaluate your income, your assets, your debt-to-income ratio, your credit score and profile, and your job history. You’ll need to provide documentation in the form of tax returns, bank statements, W2 forms, your employer’s name and address, and recent paystubs. It will save you time if you gather these items before you meet with a lender.

“Every lender is different, but most require a credit score of 640 or perhaps 620 if you have compensating factors such as a good job history or a lot of cash reserves and are applying for a government-insured loan such as an FHA, VA, or USDA Rural Housing Development mortgage,” On Q Financial’s Phyllis Casillas says. “You’ll need a credit score of at least 740 to qualify for the lowest interest rates on a conventional loan.”

A lender will also look at your debt-to-income ratio, which compares your gross monthly income to your entire housing payment (principal, interest, property taxes, homeowners insurance, and any HOA fee) and the minimum monthly payment on all other debt, such as your car payment, student loans, and credit card debt. The maximum debt-to-income ratio lenders will allow is 43 percent. For example, if you make $120,000 a year, your gross income would be $10,000 per month, so your housing payment plus the minimum payment on all other debt such as your car, credit cards and student loans, would have to be $4,300 or less, Cohen says.

Many factors go into a loan approval, such as your job history and your cash reserves, which is why it’s so important to talk directly to a lender as early as possible in the home shopping process about your individual circumstances. Even if you have a foreclosure or bankruptcy in your past, you may still qualify for a new mortgage depending on how long ago it happened and why. Lenders are well aware of the difficulties many families experienced during the recession. If you can document that you had good credit prior to a job loss or reduction in hours and your credit has since recovered, you’re in a better position than someone who has consistently mismanaged money with an overload of credit card debt. A lender can work with you to reestablish your credit or give you advice so that you’ll be able to qualify for a mortgage as soon as possible.

Once you’re comfortable with the financial side of your new home purchase you can get back into looking for the builder, community and home that suits your budget and your needs.

For more expert advice on buying and building a home, check out the free eBook download of New Home 101: Your Guide to Buying and Building a New Home at NewHomeSource.com.
Michele Lerner is an award-winning freelance writer, editor and author who has been writing about real estate, personal finance and business topics for more than two decades. You can find her on Google+.

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