11 Questions with A Leading Mortgage Lender
Have questions on financing your newly built home? We have answers.
In this exclusive New Home Source interview, we asked Mike Kelly, senior vice president for new homes for Prospect Mortgage, 11 questions important to new home buyers.
With a strong online presence and more than 150 office locations across the country, Prospect Mortgage is one of the nation’s largest independent residential mortgage lenders.
NHS: How should a homebuyer prepare to finance a newly built home? Would you offer any additional advice for a first time buyer?
Mike: The first thing I think about is not the mortgage, but purchasing the home itself. Be prepared to make a lot of decisions. An existing home has a kitchen, cabinets, flooring. You either like it or you don’t and move on. One of the exciting things about purchasing a new home is that you get to make a lot of choices and decisions. For some, it can be a little daunting, but enjoy it. You’ll have a lot of things to think about. Be prepared to go through the process and make those decisions.
NHS: There’s been a lot of press that lending standards may have been too low during the housing boom, but perhaps too tight since. What should a homebuyer know about loan approval today?
Mike: Think about buying a home first and then the mortgage process. Go into new home communities and look at a number of model homes. That will allow you to get ideas about your likes and dislikes. Developers today have many creative ideas about what housing looks like and what people enjoy. There are probably a lot of things out there you haven’t thought of, so go out there and look at a number of different homes. That will help you make well informed decisions. You also need to prepare for the mortgage process, as well. Prepare yourself to document your income and assets. Put together a list of outstanding credit that you have: car loans, student loans, credit cards. Have documentation ready. Lenders are going to request a lot of that stuff from you.
Four or five years ago, some lending standards got lax. Some buyers got used to not providing documentation. Of course, we saw the impact of that with the downturn of the marketplace – a lot of foreclosures. Now you hear about lending guidelines being very restrictive, but really it’s just responsible lending. Lenders are going to ask you to document your income and job stability and show you pay things on time and have demonstrated the ability to save money. In all likelihood, your payments are going to go up. You may be a first time homebuyer going from rent to homeownership or moving up in a home. If the payment is going to go up, a lender needs to document those things. It’s also in the buyer’s best interest. If you’re asking for $300,000 or $400,000, we need to have a file to say that a buyer has the ability to pay and that they’re going to be successful in homeownership.
NHS: What are the key steps in the mortgage process for a new home buyer? Roughly how long will the mortgage process take?
Mike: There’s two pieces to that. You can apply for a mortgage preapproval before you even sign a purchase agreement on a house. You could get that paperwork out of the way and that’s a full preapproval on a mortgage. Typically, if you do it before you sign the contract, it is generally going to take 30 days – maybe shorter for people who are very well organized with that paperwork I described. It may take a little longer if people have things in the past they have to document, but 30 days is a good timetable.
Then the home is going to be built. Depending on the size of the home and region of the country, it could take three to nine months. You get all your paperwork and you get approved in those first 30 days. Then the paperwork sits, because they have to build the home. I want to make sure everybody is aware that credit documents—bank statements, W2s, pay stubs—are only valid for 90 days. That’s a lending industry standard set in part by Fannie Mae for FHA and VA lending.
Once that home gets close to completion, the lender is going to call that buyer again and ask for that paperwork again. Often buyers, if they’re not prepared for that, get frustrated. The first question is, “Why are you asking me this? I already provided all that information.” And the answer is, “Yes you did, but a lot can change in people’s lives in six months.”
The lending industry wants to make sure that your job is still in place, you’re still paying things on time, and you haven’t spent a bunch of savings. Keep all of those documents in a file. Don’t shred them, throw them away or pack them in a box ready for moving because the lender’s going to say, “I’m going to need an updated copy of everything.”
NHS: What about the so-called “quiet period,” once you get approved but before you close? Is it important not to make big financial changes then?
Mike: That’s exactly right. Changes can impact your qualification. When the lender goes to update everything because those credit documents have expired, if you’ve taken on added debt it can hurt your qualifications even though you were approved months ago when you purchased the home.
NHS: You’ve been in the industry some time. Have you seen changes in what constitutes a good credit or FICO score? What kind of number should buyers aim at, knowing that circumstances vary?
Mike: Four or five years ago, the guidelines got too relaxed. Now all we’ve done is come full circle and say, “Hey, what’s a FICO score that demonstrates success so people are successful in homeownership?” We don’t want to get buyers into a home and then they struggle—nobody wins.
There are all kinds of mortgage products today that have quite a large variation of FICO score expectations. There are government products like FHA, the Federal Housing Administration. There are products for veterans and first time buyer loans that allow for lower FICO scores. People can get mortgages with FICO scores from the 500’s to the 800’s. For lower FICO scores, it’s a different process and a different product and probably a slightly different interest rate because of the difference in repayment risk.
NHS: When and why should a buyer of a newly built home consider locking a mortgage interest rate? Buyers of newly built homes often select options. That can cause the final selling price of a home to vary. How does a buyer know what loan amount to seek pre-qualification for?
Mike: First and foremost, meet with a lender prior to signing any purchase. Make sure you sign a contract that’s within reach—within qualification and comfort—in terms of the payment for the homebuyer. We want the buyer to be successful long-term.
It is common today that someone sees a mortgage calculator online. They use it and think, “Okay, I qualify for $250,000.” And to your point, that base model is $250,000. But when you add hardwood floors and cherry cabinets, that $250,000 price just became $280,000 because of the added options. The buyer signs a contract, then goes to the lender and finds out they’re over budget. So what buyers really want to do is find out what that their maximum affordability is, including options.
NHS: What criteria should a homebuyer use to select a mortgage provider?
Mike: Identify a lender that focuses on new construction housing. It doesn’t have to be their only focus, but financing new homes does have unique construction nuances. Does the lender offer an extended rate lock? If interest rates start moving up, a buyer wants a lender that has the ability to lock in an interest rate and guarantee it for 6-9 months while a home is being built. If rates move up, the buyer’s interest rate is locked in and they have peace of mind.
We talked about credit documents expiring. Does the lender have systems in place that flag when credit documents start expiring? The lender should call the buyer and say, “Let’s update all this stuff so there’s not a lot of pressure just prior to closing, and you can enjoy when the home’s done.”
NHS: The condominium market is heating up again. Are there special considerations and/or mortgage products for a condo buyer?
Mike: There aren’t necessarily unique mortgage products, but there are additional requirements around the condominium project and documents. It’s important to make sure that the project, the condominium owner’s association, and the legal documents are all structured properly per agency guidelines. I’m referring to Fannie Mae, FHA, and VA where lenders sell loans to government insured agencies. Those agencies have established criteria that a condominium association must meet. It’s in the interest of all parties, the buyer and the seller.
When the builder is done, he’s going to turn over control of that condominium project to the homeowner’s association. It’s important to make sure the legal documents are structured properly, are fair to all owners in that project and that the association’s budget is structured properly to maintain the grounds. It’s important to make sure the budget is adequate for maintenance in common areas, pools, tennis courts, even parking facilities. With common amenities, there’s going to be maintenance costs. Review the budget and make sure those association fees and that budget is set realistically so the association will be successful in maintaining the building.
NHS: For a consumer who wants to build a home on their own land, what are the options for construction financing and a permanent loan? Are there mortgage products available that can allow a consumer who qualifies to save time, fees or even have a single closing for both loans?
Mike: This part of mortgage financing got hurt during the downturn and it’s been slow to come back. It’s still not available at the scale it was previously.
Generally, buyers will find what we call “construction-to-perm” financing. That’s a loan where the buyer, not the builder, obtains the construction financing and a line of credit. Money is disbursed to the builder while the home is being built. For example, when the builder puts the foundation in, the bank disburses some money. When the builder frames the home or puts in rough plumbing and electrical, the bank confirms that the work is done and disburses additional money.
So there’s disbursement through the construction period. The buyer pays interest on the amount of money disbursed during the construction period. For the first disbursement, they’re going to pay interest for 30 to 60 days. The homebuyer will pay interest carry costs during the construction period, and then it rolls into a traditional mortgage. That’s why the industry calls this “construction-to-perm.”
Generally in today’s market, buyers are going to find that type of product from a local or regional bank. Those banks have credit lines from their deposits. They also have local people that can hop in the car and inspect the construction when a builder asks for disbursement to confirm that things are complete.
NHS: As senior VP for new home construction of a large mortgage originator, you’ve seen a lot of change. Where do you see the mortgage industry heading in the years ahead?
Mike: The future is bright. In fact, today you probably saw that new home sales were up 18% this past month – and yet new home sales are only 64% of the peak when the market was the hottest. We’re on a good trajectory but also have a lot of room to grow.
You continue to hear about no inventory in the marketplace. I’m in California as we speak and California has a terrible shortage of homes for sale. Prices have also come down significantly. That bodes well for someone thinking long term. When you own that home for five to ten years or more, history tells us that it’s going to appreciate and that it’s going to be a good investment.
NHS: If you were talking to a family member or someone whose first knowledge of the housing market was this unusual downturn of the housing market, would you tell them that there’s reason to be optimistic about homeownership in this country going forward?
Mike: I’ve got a son that just graduated from the University of Connecticut in May. He’s got his first job. I imagine in the next couple of years he’ll start thinking about homeownership. I will encourage him as soon as he’s comfortable and financially ready. Long term, it will be a good investment but the primary reason for buying a home should not be purely the investment part: it’s where you come home to, it’s comfortable, it’s family. The stock market goes up and down, so does the real estate market. There’s ebbs and flows, but over time your value is generally going to rise.