A couple of months back I sent all House Building Guide and HomeBuilding Pitfall customers and members an email about the state of the mortgage market. This month's newsletter is an update to that email.
In a couple of ways I am reminded of Dickens, the Tale of Two Cities, except this is the Tale of Two Banks. The first bank, IndyMac Bank, made great market penetration over the past decade in the new home construction market. They "owned" the internet lending space for first time home buyers and move up homebuyers with less than excellent credit. (620).
The achieved their success, in part, by allowing approved influence partners in the construction industry offer the loans direct (retail) instead of only via brokers (wholesale). The shift allowed people that actually knew a thing or two about home construction have hand in matching the project needs along side the loan approval. For years it worked great. With the activity of new applications, closings and projects converting at a record pace - the sky was the limit.
However, as the secondary mortgage market investors began their total exodus away from sub-prime mortgage notes, the same investors stopped buying short construction notes as well. To protect themselves from the defaults in the sub-prime debacle the criteria for approving construction loan applications was tightened, tighten again and even tightened further, on a variety of fronts. Here are some of the change Indy made over the past several months:
- No more first time homeowners;
- Credit scores requirement increasing weekly to top out at over 700;
- Cash reserves required from 2 months (PITI) to 9 months;
And of course these change Indy made don't account for market forces, like soft markets and lower appraisal numbers, which also increased the challenge of putting a loan in place.
No company can survive when it is forced to turn 180 degrees away from the core market it started (and spent so much) to attract. After battling an ever increasing current, moving against it, Indy Mac decided that as of 2/29/08 to exit the Construction Lending Business.
Take two on Dickens. it was the best of times, it was the worst of times. For Indy it has been the worst of times, but for others, and for you, it can be the best of times.
Life like business does not stand still. We also do not live in vacuum. The same forces that helped create the boom can now work for you if you know what to do. It was not that long ago that builders were so busy they wouldn't give you the time of day. Well. it's a buyers market again. Builders are willing to do things they did not have to before to get your business - communicate, educate, and allow you to participate.
You may think that you can no longer qualify for a construction loan due to the more stringent program requirements. You may be right.
However, while some banks are retreating from construction loan programs- - others are seizing the opportunity to gain market share in this still lucrative sector of the mortgage market. It's the old "half-full" vs. "half empty" perspective.
We have recently found formed a relationship with a company called, Help2Build. This company provides a one-stop, turnkey, construction consulting service to assist consumers building new homes.
While there are a number of solid reasons for entering into this relationship with Help2Build, there is one that is outstanding. Let me explain. For thousands of people who have purchased the House Building Guide I have laid out a strategy or approach that can be used to save thousands of dollars when building your new home and hiring a builder to do so. Well, Help2Build has a lending partner that not only recognizes this approach but has a loan program tailored directly for this type of project. They call it an Owner-Involved project. That is tremendous news for House Building Guide customers because you now will have a lending partner that understands this approach and actual will help you implement it.
TheHelp2Build has a number of useful tools and services that will benefit our customers. We are still ironing out some details and I will be providing you more information in about a month. However, at present, Help2Build would like to introduce itself to our family of customers. It is doing so by offering a Free Mortgage Pre-approval.
Now you may be thinking to your self this is no big deal. but I say not so fast. Remember the significantly more stringent requirements for loans today. Many, many people with decent credit cannot qualify that could just a few months ago. To qualify today you need almost stellar credit.
However, Help2Build works with a bank that does not depend upon outside money from the secondary market. This is the money that has dried up, and its paucity is what makes getting a loan so difficult. Rather than use their own in-house based reserves. What his means is that THEY set the criteria, not someone from the outside. And I think you'll like this criteria.
- First time homeowners are welcome
- Modest down payment requirements of only 0-3%
- Credit score requirement of 590 or above
- Cash reserve requirements of 2-3X monthly mortgage payment
- Full Doc loans only (W-2 income or line 43 of 1040)
- Builder/GC or On-site supervisor
- Loan is designed to accommodate the money savings approach outline in the House Building Guide
To take advantage of this offer, please go to the Help2build.com website. You will know you are on the right page because you will see our name on the page.
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Since credit scores play such a make or break factor in qualifying a loan, it is timely, especially in today's market they we quickly review this topic again.
Several years ago, credit scoring had only a modest impact on home mortgages. That has all changed. Lenders studied the relationship between credit scores and mortgage delinquencies and found a definite relationship. Almost half of the borrowers with FICO scores below 550 became 90 days delinquent, at least once, during the term of their mortgage. Compare this to borrowers with FICO scores of over 800 - here the delinquency rate was only 2 in 10,000.
FICO stands for Fair Issac and Company and is the credit scoring system used by the three major credit agencies in the U.S. These three companies are Trans-Union, TRW (Experian), and Equifax.
How does your FICO score impact your mortgage application? In two ways: One way is in the acceptance or rejection of your application. The other is in the rate/amount that you get charged. For example, some lenders establish a base price and will reduce the points on a loan if the credit score is above a certain level. Other lenders, instead of reducing costs for good FICO scores, will add costs for lower FICO scores. The net result is the same. A lower FICO score may result in more costs or charges to the borrower.
Because of the impact of FICO scores on your mortgage, it is important to understand those items that have a negative impact on it. Some of these are:
- Short Credit History
- Revolving Credit accounts (credit cards/charge accounts), maxed or near limits
- Bankruptcies, judgments, or liens
- Too many revolving accounts
- Too few revolving accounts
- Too many credit inquiries
Protect your FICO score. It is an important factor in getting the best rates and lowest charges. What is the best way to do this? Live within your means, don't open needless or an excessive number of charge accounts, and pay your bills on time.
Now that you have an understanding of the importance of credit scores, you can also understand why it is also a good idea, at the very beginning, to run a credit report on yourself. You may not think you have bad credit - and you may not - but what about that person who is using your social security number fraudulently, or the bill you never paid to that thief of an auto mechanic? It is well worth your time and money to take a look at your credit history and clear up any problems before you go talk to your friendly banker.
By law the credit bureaus must give you a free credit report (on yourself) once per year. You can order this credit report at www.annualcreditreport.com
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