Financial Smarts – Part 1

Where Do I Start?

When it comes to paying for your custom-built home, do you know where to find your financing? Many don’t.

Find the Right Loan Officer for Your Custom Home

Should you peruse the Sunday papers looking for the best deal or stop by your neighborhood bank to see their rates? Do you need a mortgage lender or a mortgage broker? When it comes to finding the right home financing plan, it’s really all about dollars and sense.

First, let’s define the difference between a mortgage lender and a mortgage broker. Most mortgage lenders can be found at a banking institution. Their services are provided as a bank service. A mortgage broker, on the other hand, charges fees to go out and find a lender for you based on your specific financial qualifications. As a custom homebuyer, you should look for a loan officer who has experience in construction financing with the education and experience to match the banking institution. The best and most reputable lenders won’t be found by scouring the Sunday papers to find the lowest rate. If you’re seeking competitive rates among several lenders, don’t just focus on the price. While one lender may offer a terrific rate, you may be sacrificing speed, service, or their ability to actually help you acquire a loan.

Credit Scores and Debt-to-Income Ratio for Home Loans

The best place to start is to ask your builder who he recommends. Like his vendors and subcontractors, he should be working with a reputable competent loan officer. You may want to ask your friends for referrals as well. In these volatile market conditions, it’s wise to have a trustworthy loan officer with sufficient experience to guide you down the path of one of the biggest financial decisions of your life. A good question to ask up front is whether the loan officer will be working with you during the entire process or will you get passed off to another person in another department. Once you’ve narrowed your choice, you’ll want to meet with your loan officer to determine what size loan you qualify for to build your custom home. You’ll need to fill out a loan application that will focus on three key areas: your credit, your debt-to-income ratio, and your liquidity (assets and retirement reserves). While the application can be filled out online or sent back by email, it’s probably better to take the time and fill out the forms in person. Block off at least an hour to do this and answer any relevant questions your loan officer may have. This is where all of your time spent organizing and filing will pay off. You’ll need to bring the most recent copies of pay stubs, your W2 forms, and two previous years’ tax returns.

What to Expect When You Submit Your Home Loan Application

Also bring your most recent statements of checking and savings accounts, retirement funds, IRA account information, and other assets that show your financial strength. Loan officers advise clients to disclose all of their assets on the application form to give the most flexibility in arranging loan approval.

One of the items that will determine your ability to obtain a loan is your credit score. A credit score is a number that is determined by the three major credit-reporting agencies (Experian, Equifax and TransUnion) and is based on historic and current data that determines your credit risk. These numbers are not set by the mortgage lenders or by the banks. Your credit report is your financial thumbprint: every purchase you’ve made, every bill you’ve paid (or didn’t pay), and every loan you’ve applied for (car, mortgage, etc.) is logged on your credit report. A credit report is used to determine an individual’s credit worthiness. Credit scores range from 300 to 850, and the higher your credit score, the more desirable you look to a financial institution for a loan. Keep in mind, the higher your credit score, the lower the interest rate you can probably get.

It is a good idea to check your credit report before applying for a loan to check for any inaccuracies, especially if you have a common name. Before applying, you may also want to pay down as many debts as possible to help improve your income ratios. Also, the major credit bureaus offer services that will educate you on how to increase your credit scores. They are the experts. Remember, your debt-to-income ratio and credit score are important factors when qualifying for a mortgage loan.

Tips for Selecting the Best Mortgage Lender for Your Custom Home

When you are ready to submit the completed application and supporting financial documents, you may be required to pay $300-$500 to process your application with the lender. Once all of your financial documentation is turned in and reviewed, the loan officer will submit the application to the underwriter for approval. It usually takes 3-5 days to hear whether you’ve been approved or denied for the loan. An approved loan will usually come back with a capped interest rate for a specific period of time (30, 60, or 90 days). Once you receive the call from your mortgage loan officer with the good news, you’re on your way to the next step of the financial process.

Ask for referrals from your builder to determine the best lender for your financial needs

-Sean Sullivan