National Association of Home Builders Archives

Apache is functioning normally

September 28, 2023 by Brett Tams

How much does it cost to build a house?

Building your own place can be immensely fulfilling. And you should end up with exactly the home you wanted. But you often need a flexible timeline and deep pockets.

How can you finance a land purchase and construction project? Should you even try? Read on to see what your best options could be.

Find your lowest mortgage rate. Start here

In this article (Skip to…)

The cost to build a house

In 2022, a new home in the U.S. cost $392,241 to build on average, according to the National Association of Home Builders (NAHB). However, that excludes the cost of buying and financing the land on which you wish to build. With that added in, you may well be looking at something north of $500,000.

Of course, those costs can vary significantly depending on where you live. Some states and areas have vastly more or less expensive land prices and labor costs. Even the costs of materials can differ across the country.

Check your home buying options. Start here

Inflation weighed heavily on construction materials in recent years. The following graph from the Federal Reserve Bank of St. Louis suggests price pressures were easing by July 2023. So comparing a friend’s new build from a few years ago may not be a good barometer for new construction now.

Many (probably most) of the homes in the NAHB study were likely built as part of large developments comprising dozens or hundreds of homes. We excluded developers’ costs, such as financing, marketing, sales commissions and profits from the numbers we cited. Large developers also may enjoy economies of scale on labor and materials costs that won’t be open to you on a single project. So, use the NAHB’s figures only as a very rough guide when calculating your own cost to build a house.

Breakouts of the costs associated with each building stage

The NAHB breaks down those average 2022 costs by different elements in the process:

Find your lowest mortgage rate. Start here

Site work (fees for permits, impact, inspections, architects and engineers): $29,193
Foundations: $43,086
Framing: $80,280
Exterior finishes (including doors, windows, garage door, roofing and exterior wall finish): $46,108
Major systems (plumbing, electrical, HVAC and other): $70,149
Interior finishes (everything to bare-wall finish, including kitchen, bathrooms and appliances): $94,300
Final steps (landscaping, outdoor structures, driveway, clean up …): $23,065
Unspecified others: $6,059

Remember, those are only the elements that make up the average cost to build a house of $392,241. Read on for why your costs could be much higher or lower.

Factors that can change the cost to build a house

An endless list of things can make your home-building project’s costs vary from the average. Some of the biggest include:

Find your lowest mortgage rate. Start here

Location — Labor costs and land prices aren’t consistent across the country, with some states and areas significantly more or less expensive than others. Urban settings generally have higher costs than rural ones
Isolation — You may dream of living far from the general public or off the grid entirely, but you’ll likely pay more for materials and labor to travel there
Site conditions — If your construction site isn’t easily accessible for heavy machinery and deliveries, you’ll have to pay for it to be made so. If it’s steeply sloping or hard to excavate, that, too, will add to your costs
Square footage — A sprawling McMansion can cost 10 or 20 times as much to build as a tiny house. The NAHB study says the average home comprised 2,561 sq. ft. in 2022. So, scale up or down from that
Finishes — Will you be importing slabs of Italian marble and several antique fireplaces and fountains from Europe? Or will you rely on Home Depot and your contractor’s trade accounts for your finishes? The price difference could run from the thousands into millions
Amenities — Do you want a pool, firepit, hot tub, home theater, gym, games room, indoor basketball court, and a dedicated gift-wrapping room? Those luxuries will cost extra

It’s good to have an average homebuilding budget as a starting point. But you’re going to have to make a lot of adjustments as your plans evolve.

Ways to finance a newly constructed home

Unless you have serious funds squirreled away, you’ll likely have to borrow to finance the purchase of your land and to pay for your construction project.

Check your home loan options. Start here

You have a dizzying array of options, including:

Land loans (aka lot loans) — Especially useful if you want to hold the land for a while before developing it
Home equity loans — Borrow a lump sum secured by the equity (the amount by which the value of your home currently exceeds your mortgage balance) in your existing home. You repay in equal installments over a period that you largely set
Home equity lines of credit (HELOCs) — Again, you’ll need plenty of equity in your existing home. You get a line of credit, meaning you receive a credit limit and can draw up to that amount. You pay interest only on your balance so these can be good for short-term borrowing or longer-term projects where costs arise over time
Personal loans — No collateral required. But you’ll typically need an uber-high credit score and very sound finances to get a competitive rate
Construction loans — These short-term loans can be combined with land loans to finance the whole process of getting you into your custom home. You can then refinance both into a new mortgage. Or you can opt for a “construction-to-permanent loan,” which lets you pay for everything with a single closing on your mortgage

For many homebuyers, a construction-to-permanent loan is the obvious choice. Popular ones of these are government-backed, by the FHA, VA or USDA. And that means you need only a small (3.5%) or no down payment. You also don’t need a stellar credit score to get approved.

Who offers these loan types?

There’s no shortage of lenders of home equity loans, HELOCs or personal loans. Nearly all mortgage lenders offer the first two, and plenty of banks and specialist lenders offer the third.

However, land loans and construction-to-permanent loans are a different matter. They’re specialist loans that many lenders — with otherwise wide portfolios of mortgage products — won’t touch them.

But don’t despair! They’re out there. You just have to track them down.

Is building a home right for you?

Building your own home isn’t for everyone. But the advantages of doing so are immense.

Most importantly, you get to choose everything: from the building style and layout, to every detail of the finishes. That means you get a sense of complete ownership that evades many who buy an pre-designed home from a developer.

Check to see what mortgage rate you qualify for. Start here

But there are disadvantages. First, the cost to build a house is often higher than buying an existing home. Then there’s the hassle. Even if you employ a project manager, there will be endless details that only you can decide upon. And, of course, you could face frustrating delays and cost overruns. If you’re impatient or on a tight budget, you could save a lot of headaches by opting for an existing home.

The bottom line: Cost to build a house

Don’t underestimate the challenges and costs of building a house. But also don’t underestimate the sheer joy of living in a home that’s been custom-built to meet your needs.

It’s like commissioning a tailor-made suit or gown that fits you precisely. You look great and feel comfortable. Of course, this tends to come at a higher price — both the dollar costs and the probability of unexpected budget and timeline changes.

But you have plenty of choices when it comes to financing your adventure. If you’re ready, reach out to a local lender and see what your best loan options are.

Time to make a move? Let us find the right mortgage for you

Source: themortgagereports.com

Apache is functioning normally

September 22, 2023 by Brett Tams

No one can predict the future of real estate, but you can prepare. Find out what to prepare for and pick up the tools you’ll need at the immersive Virtual Inman Connect on Nov. 1-2, 2023. And don’t miss Inman Connect New York on Jan. 23-25, 2024, where AI, capital and more will be center stage. Bet big on the roaring future, and join us at Connect.

The U.S. looks to be headed for a “mild recession” in the first half of next year, but continued strength in the economy could keep mortgage rates from coming down as much as previously expected, economists at mortgage giant Fannie Mae said in a forecast released Monday.

While the Federal Reserve isn’t expected to raise rates when policymakers wrap up a two-day meeting Wednesday, persistent inflation could still prompt the Fed to hike rates later this year, or implement a “higher for longer” rate strategy.

The good news is that even though mortgage rates have settled in above 7 percent, the risk that rates will do even more damage to home sales is limited, as the share of cash purchases remains high and sales are now driven more by life events than discretionary move-up buys, Fannie Mae forecasters said.

Nevertheless, Fannie Mae economists forecast that home sales will drop by 14.7 percent this year, and stay at about the same level next year.

“We expect that total housing market activity will remain at a low level into 2024 as the Federal Reserve continues to hold the line on interest rates against inflation,” Fannie Mae Chief Economist Doug Duncan said, in a statement.

Last month, economists at Fannie Mae were expecting rates for 30-year fixed-rate conforming mortgages would peak at 6.8 percent during the third quarter of this year before retreating to an average of 6 percent during the final three months of 2024. Forecasters at the Mortgage Bankers Association (MBA) were even more optimistic, predicting mortgage rates would drop to an average of 5 percent by Q4 2024.

Mortgage rates projected to ease next year

Source: Fannie Mae, Mortgage Bankers Association forecasts.

That was before strong economic data sent rates on the popular 30-year fixed-rate conforming loans soaring to a 2023 high of 7.30 percent, according to rate lock data tracked by the Optimal Blue Mortgage Market Indices, which show rates have only pulled back slightly since then.

With the economy cooling more slowly than expected, Fannie Mae analysts now see mortgage rates peaking at 7.1 percent during the final three months of 2023, before easing to 6.3 percent by Q4 2024. In releasing their latest forecast Monday, MBA economists predicted mortgage rates will start coming down this year, but remain well above 5 percent next year.

Home sales projected to drop 17.4% this year

Source: Fannie Mae Housing Forecast, September 2023.

Fannie Mae is forecasting 4.8 million total home sales in 2023, which would be a 17.4 percent drop from last year and the slowest annual pace since 2011. Next year isn’t expected to be much different, with sales expected to bounce back by less than 1 percent.

“While the additional downside risk from rate movements to date is minimal, the prospects of a recovery in existing sales in the near future is unlikely given strong mortgage rate ‘lock-in’ effects and stressed affordability,” Fannie Mae economists said in commentary accompanying their September forecast.

New home sales are expected to grow by more than 6 percent this year, as builders race to complete homes in markets where the lock-in effect — reluctance on the part of homeowners to give up the low rate on their existing mortgage — has made listings scarce.

“New home sales were surprisingly strong in the first half of the year, due partly to homebuilder rate buydowns, which become more expensive when mortgage rates rise,” Duncan noted. But he said Fannie Mae forecasters expect new home sales to pull back slightly next year, “due to the higher mortgage rate environment and recent decline in homebuilder confidence.”

The National Association of Home Builders/Wells Fargo Housing Market Index, a gauge of builder confidence, dipped six points in August and another five points in September, to 45. It was the first time the index has been below 50 in five months, which indicates more builders view conditions as poor than good.

The recent rebound in mortgage rates “is making homebuilders nervous,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients Monday.

“To be clear, the impact of mortgage rates returning to 7-1/4 percent from their recent 6-1/2 percent lows will be nothing like as bad as the initial surge from 3 percent to 7-1/4 percent in the year to September 2022,” Shepherdson said. “But it ought to be enough to quash the nonsensical media/Fed narrative that the housing market is starting to recover. It isn’t.”

Large pipeline of multifamily housing coming online

Source: Fannie Mae Housing Forecast, September 2023.

Fannie Mae economists expect single-family housing starts to plateau at 910,000 next year, and for multifamily construction to slow by 22 percent, to 389,000 units.

“With sluggish rent growth on a national level, more normalized vacancy rates, and tighter construction and development loan lending standards, we expect multifamily construction starts to continue to slow,” Fannie Mae forecasters said. “These dynamics may also play into softening demand for single-family housing: There is a large pipeline of multifamily housing coming online, and the rent-to-buy calculus for prospective homebuyers may tilt a little more in favor of renting for longer.”

Mortgage lending expected to grow by 20% next year

Source: Fannie Mae Housing Forecast, September 2023.

With home prices holding firm and mortgage rates expected to ease next year, Fannie Mae forecasters expect mortgage originations will grow by 20 percent next year. The slight uptick in home sales projected for next year would boost purchase loan originations by 9.4 percent, to $1.433 trillion, while lower mortgage rates are expected to boost refinancing by 76 percent, to $442 billion.

Mild recession seen as ‘likeliest outcome’ of Fed tightening

Fannie Mae economists have been predicting that the U.S. was headed for a recession since April 2022, after the Fed began raising interest rates and the impact of stimulus measures introduced during the pandemic faded.

While mixed economic data continues to “muddle the near-term outlook,” Fannie Mae economists say they continue to expect a “mild recession” in the first half of 2024, based on the belief that consumers will need to rein in spending in order to live within their means.

“Fundamentally, personal consumption remains at what we believe to be an unsustainable level relative to incomes, and the full effects of monetary policy tightening are still working through the economy,” Fannie Mae forecasters said.

In their weekly brief on the U.S. economy, Shepherdson and his Pantheon Macroeconomics colleague Kieran Clancy noted three potential wildcards on the economic horizon: A strike launched last week by the United Auto Workers targeting the big three automakers, next month’s resumption of federal student loan payments, and a “likely” government shutdown.

“An all-out strike lasting a month could be expected to depress quarterly GDP [gross domestic product] growth by about 1.7 percentage points, before taking account of the hit to the supply chain,” the Pantheon Macroeconomics team said. “The problem for the Fed is that it would be impossible to know in real time how much of any slowing in economic growth could confidently be pinned the strike, and how much could be due to other factors, notably the hit to consumption from the restart of student loan payments. The latter already is making itself felt in falling restaurant diner and airline passenger numbers.”

Fannie Mae economists agree that a sustained strike could “drive a negative payroll report in October, as well as dampen the GDP measure,” but that a short-lived strike “would likely be followed by a rebound in auto manufacturing output thereafter.”

Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter

Source: inman.com

Apache is functioning normally

September 5, 2023 by Brett Tams

Large metro core counties posted the lowest annual single-family home building growth rate at -24.8%. All large and small metro areas reported double-digit negative growth rates, while rural markets (defined as micro counties and non-metro counties) recorded single-digit negative growth rates.

The share of single-family building has declined most notably in large metro areas (defined as core, suburban outlying), with these areas representing just 49.8% of all single-family building in the quarter. This share is a data series low, and it comes after seven consecutive quarters of decline. Single-family building in small metro core and outlying counties represented 38.4% of all building during the quarter, while 11.7% of single-family building occurred in micro and non-metro/micro counties during Q2.

Despite the declines, over the past four years, rural markets have shown resilience, as the single-family home building market share has risen from 9.4% at the end of 2019 to 12% earlier in 2023.

Alicia Huey, the NAHB chairman, also believes that single-family construction has bottomed out.

“Single-family production should register growth in the months ahead as the Federal Reserve nears the end of its tightening cycle and mortgage rates begin to stabilize,” Huey said.

In the second quarter of 2023, the multifamily sector reported positive annual growth rates in just three markets, rising 26.6% in non-metro/micro counties, 15.9% in large metro outlying counties and 3.1% in micro counties. Large metro core counties reported the lowest multifamily production growth rate, with a yearly drop of 10.6%. This is the third quarter in a row where this geographic area posted the lowest year-over-year growth rate. Since the start of the pandemic in Q1 2020, the market share of multifamily building in large metro counties has fallen from 42.2% to 37.4% in Q2 2023.

After rising for the first seventh months of the year, homebuilder confidence declined in August, dropping six points from July to a reading of 50, as builders cited rising mortgage rates and a shortage of construction workers for reasons for the decline.

Source: housingwire.com

Apache is functioning normally

September 2, 2023 by Brett Tams

I’ve brought up the issue of housing affordability several times over the past year, and things don’t appear to be getting any better on that front.

The latest piece of bad news comes from the National Association of Home Builders, which released its Housing Opportunity Index (HOI) late last week.

The HOI measures what percentage of homes sold in a given area are affordable to families earning the corresponding area’s median income during a specific quarter.

During the third quarter, only 64.5% of new and existing homes sold were deemed affordable to families earning the national median income of $64,400.

That number is down from 69.3% in the second quarter, marking the largest quarterly HOI decline since the second quarter of 2004.

The index peaked in the first quarter of 2012 with 77.5% of American households able to afford the median priced $162,000 home.

Since then, there’s been a pretty steady decline as home prices seemed to hit bottom and then surge upward.

Higher Home Prices and Rising Mortgage Rates the Culprit

The ongoing problem in the housing market (assuming you’re not already an owner) is higher home prices coupled with rising mortgage rates, two trends that don’t appear to be changing anytime soon.

The median price paid for a home increased to $211,000 in the third quarter from $202,000 a quarter earlier.

Meanwhile, interest rates on the 30-year fixed mortgage jumped from 3.73% to 4.45%, which further dented affordability.

Back in the first quarter of 2012, the median price was $162,000 and fixed mortgage rates averaged around 4.32%.

So mortgage rates alone aren’t actually much of a problem. But when you consider the fact that home prices have risen around 30%, the same low mortgage rate just won’t cut it for some families.

If the Fed wants to keep the party going, it would have to drive mortgage rates down even lower to keep affordability at recent highs.

Crisis Levels Are Still a Few Years Away, Hopefully…

Still, we aren’t nearly as bad as we were before the entire housing market unraveled.

In much of 2005, 2006, and 2007, just over 40% of American households could afford the median priced home.

In fact, there was a point when the number nearly dipped into the high-30% range. At that time, home prices were closer to $250,000 and 30-year fixed mortgage rates were nearly 7%.

So one could argue that things aren’t too bad, yet. But we’re already starting to see bubbly characteristics, like arguments to go with an ARM instead of a fixed mortgage.

The ARM-share of mortgage applications is still low, but it will likely inch up as home prices and fixed rates continue to rise.

At the same time, lenders will probably come up with clever new products to boost affordability, and before you know it, we’ll be back to square one.

For the record, the California Association of Realtors also released its housing affordability indices last week.

Their “Traditional Housing Affordability Index” (HAI) revealed that just 32% could purchase a median-priced, existing single-family home in the Golden State during the third quarter, down from 36% in the second quarter and 49% a year earlier.

In the San Francisco Bay Area, only 21% of households could afford to buy a home, compared to 35% in the third quarter of 2012.

Statewide, it’s the first time the HAI has been below 35% since the third quarter of 2008. Affordability peaked at 56% in the first quarter of 2012.

This is worrisome, given how low mortgage rates continue to be. But with a lack of inventory, there’s no reason home prices shouldn’t continue their meteoric rise.

The question is when do we hit that tipping point where everyone tries to sell at the same time?

Source: thetruthaboutmortgage.com

Apache is functioning normally

September 1, 2023 by Brett Tams

Apache is functioning normally

August 29, 2023 by Brett Tams

It was bound to happen. Just as home builders began to feel more confident about attracting potential buyers, rising mortgage rates are proving too much for those customers.

After steadily rising for seven consecutive months, builder confidence retreated in August as rising mortgage rates nearing 7% (per Freddie Mac) and stubbornly high shelter inflation have further eroded housing affordability and put a damper on consumer demand.

Builder confidence in the market for newly built single-family homes in August fell six points to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released August 15.

Home Builders Need Workers, Buildable Lots and Distribution Transformers

“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala.

Huey said that other factors are helping support the demand for new construction.

“But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many homeowners elect to stay put because they are locked in at a low mortgage rate.”

Housing Affordability Compared to US Median Income

Rising home prices and interest rates coupled with elevated construction costs, low existing inventory and solid demand resulted in a significant decline in housing affordability during the second quarter of 2023.

According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), 40.5% of new and existing homes sold between the beginning of April and end of June were affordable to families earning the U.S. median income of $96,300. This is down from 45.6% posted in the first quarter of this year, and the second-lowest reading since NAHB began tracking affordability on a consistent basis in 2012.

Where to Buy? Affordable Housing Markets Around the Country

The Housing Opportunity Index shows that the national median home price increased to $388,000 in the second quarter, up from $365,000 in the previous quarter. Meanwhile, average mortgage rates rose from 6.46% to 6.59% during this period.

The top five most affordable major housing markets in the second quarter of 2023 were:

Lansing-East Lansing, Mich.
Scranton-Wilkes-Barre, Pa.
Harrisburg-Carlisle, Pa.
Indianapolis-Carmel-Anderson, Ind.
Pittsburgh, Pa.

Top five least affordable major housing markets—all located in California:

Los Angeles-Long Beach-Glendale
Anaheim-Santa Ana-Irvine
San Diego-Chula Vista-Carlsbad
Oxnard-Thousand Oaks-Ventura
San Francisco-San Mateo-Redwood City

Meanwhile, Cumberland, Md.-W.Va., was rated the nation’s most affordable small market, with 95.5% of homes sold in the second quarter being affordable to families earning the median income of $89,900.

The top five least affordable small housing markets were also in the Golden State. Tied at the very bottom of the affordability chart were Salinas, Calif., and San Luis Obispo-Paso Robles, Calif., where 6.5% of all new and existing homes sold in the second quarter were affordable to families earning the area median income of $100,400 in Salinas and $113,100 in San Luis-Obispo-Paso Robles.

NAHB Chief Economist Robert Deitz Calls for Government Action

Deitz said that government policies aimed at helping builders could help the housing shortfall. He said the shortfall is currently about 1.5 million housing units.

“Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%,” said NAHB Chief Economist Robert Dietz. “The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units.”

Builders Again Pressed Into Using Sales Incentives

The August HMI survey also revealed that rising mortgage rates are causing more builders to use sales incentives to attract home buyers.

After dropping steadily for four months (from 31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August.

The average decline for builders reducing prices remained at 6%. And the share of builders using incentives to bolster sales was 55% in August, higher than in July (52%) but still lower than in December 2022 (62%).

For the latest, follow us on Google News.

Image: Envato Elements

Source: smallbiztrends.com

Apache is functioning normally

August 28, 2023 by Brett Tams

Read more: Housing starts surge despite mixed economic signals While the months’ supply dropped modestly to 7.3 months, the estimated number of homes for sale jumped 11.3% to an all-time high of 108,000 – suggesting that housing starts could continue to increase over the coming months if strong demand persists. The number of completed homes … [Read more…]

Apache is functioning normally

August 27, 2023 by Brett Tams

Builders have addressed their inability to keep up with demand for new homes, saying there simply aren’t enough workers to build them.

Building firms point out there are around 250,000 unfilled construction jobs in the U.S. today, including positions for home framers, electricians, masons, carpenters and others. This shortage of workers means that new home construction is being held back.

“It takes me twice as long now to do an estimate as it used to,” Jason Scott, owner of North Star Premier Custom Homes in Westlake, Ohio, told realtor.com. He reckons that he now has to wait an average of 8 to 10 weeks in order to procure workers for his projects, whereas before it would take just a single day. Unfortunately Scott is not alone, as many builders face similar recruitment problems, the National Association of Home Builders said.

“We’ve got rising housing demand at the same time that the residential construction industry lacks workers,” said Robert Dietz, the NAHB’s chief economist.

Dietz said that builders expect to complete around 900,000 new single-family homes this year, which is far below the 1.2 million needed to keep pace with buyer demand.

Builders are being blamed for not building more homes amid an intense shortage of housing inventory across the nation. Economists say that the lack of new homes is also to blame for rising home prices across the country.

But the builders say the lack of workers means higher costs, with subcontractors taking advantage of the situation to increase their prices by around 10 percent this year alone, Scott said. He told realtor.com that he’s now paying double for framing workers compared to what they were receiving a decade ago.

“I know builders who haven’t factored these [workers’ pay] increases in, and they’re watching $10,000 to $15,000 come off their bottom line,” Scott said.

The construction industry saw thousands of workers leave during the last housing crisis and many of those have not returned. Things have been complicated further by a decline in vocational education courses, which means fewer young people are pursuing a career in trades.

Some organizations are stepping in to train more workers for construction. The Home Builders Association in Colorado Springs, Colo., for example, has partnered with a local school district to start a vocational program, Careers in Construction, in six schools. Home Depot recently pledged $50 million to the Home Builders Institute, an educational trade group, to support a Pre-Apprenticeship Certificate Training program in schools and on military bases.

“The worker shortage is severe,” Dietz said. “The industry is going to have to recruit the next generation of construction workers—or we’ll continue to underbuild houses, there won’t be enough houses, and home prices will continue to rise faster than incomes.”

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].

Apache is functioning normally

August 25, 2023 by Brett Tams

If you’re a home buyer in today’s market, there’s a bit of good news: an influx of new construction. In response to the low levels of existing home inventory, residential builders are working to meet demand. In June 2023, new home sales in the U. S. made up 14.35 percent of total home sales, according to the National Association of Home Builders (NAHB) — an increase of 4.46 percent year-over-year.

On top of building the home, a residential developer often can help you buy it, too. Called home builder financing or preferred lending, getting a mortgage this way can mean a speedier closing, discounts and special perks for borrowers. However, it can also result in higher interest rates, more stringent qualifications and potentially more expensive loans overall.

So is it a good idea to finance your home purchase through a construction company? Here’s how borrowing from a builder works, and what you should know before filling out any applications.

What is home builder financing?

Home builder financing simply means a mortgage for a newly built home that’s offered through the construction company or developer. Some of the largest firms have their own standalone home-financing arm: National builder Toll Brothers, for example, provides loans through its subsidiary, Toll Brothers Mortgage Company. Other builders have ongoing partnerships/arrangements with independent mortgage companies or banks, known as their “preferred lenders.”

This can be a mutually beneficial relationship. However, to ensure there are no conflicts of interest, lenders must closely follow the terms of the Real Estate Settlement Procedures Act (RESPA), which dictates that they cannot legally receive kickbacks, referral fees or other unearned fees from the builder — or bestow them, either.

Home builder financing requirements

If you’re buying a production or a spec house — a move-in ready home built in a development before there’s a buyer — qualifying for a loan with a preferred lender is similar to getting a mortgage from any lender. You’ll likely be able to choose between a variety of financing products such as a conventional loan or FHA loan. These kinds of mortgages typically require a minimum down payment of 3 to 5 percent and a credit score of at least 620 (for conventional) or 580 (FHA). Some lenders even offer jumbo or other non-conforming loans.

If you aim to have a home custom-built, financing can be more complicated. You’ll need to get a construction loan (either independently or through a preferred lender), which can have stricter requirements, as well as higher fees. You’ll generally need a 20 percent down payment and a credit score of 680 for this sort of financing, though the terms can vary by lender.

Home builder financing deals

To encourage borrowers to use their financing, home builders often offer deals. In fact, nowadays “we are seeing incentives of some sort in most new construction developments,” says Patty Zuzek, real estate broker at Fieldstone Real Estate Specialists and vice president of sales and marketing for Fieldstone Family Homes in Minnesota. Through these deals, home buyers may be able to increase their buying power by financing through the home builder.

Home Equity

Bankrate insights

In August 2023, 55% of builders provided incentives to bolster sales, up from 43% in 2022, according to the National Association of Home Builders (NAHB). A quarter of builders (25%) reduced their home prices, by 6% on average.

.

Financing incentives

Special offers may include upgrades for the home (like better appliances) or downgrades of the home price, a credit towards closing costs or a discount on the mortgage rate. The particular incentives the builder (or their preferred lender) offers are dependent on the type of construction and financing, according to Zuzek. For instance, a borrower going with a preferred lender’s FHA loan to buy a new home in an existing development will be offered different incentives than someone financing a custom-build on their own lot.

Mortgage rate buydowns

Home builder incentives are also highly market-driven, Zuzek says. For example, home builders are responding to current high interest rates by offering a mortgage rate buydown on new construction if you go with their preferred lender. Mortgage rate buydowns — also known as temporary buydowns — are discounts on loan interest rates. They involve the builder, lender and/or buyer paying upfront to knock percentage points off the interest rate for the first one to three years.

Mortgage 30 Year

Bankrate insights

One common type of temporary buydown is the 2/1 buydown, which lowers the borrower’s rate by 2 percent for the first year, then by 1 percent for the second year. For example, say you take out a 30-year mortgage with a rate of 7.25 percent and have a 2/1 buydown. The first year, your rate will be 5.25 percent, the second year it will be 6.25 percent and the third year it will be 7.25 percent, where it will remain for the rest of the loan.

To get a buydown, “depending on which builder you work with, you’ll need to work with their preferred lender and their preferred title company,” says Zuzek. That’s because the lender pays for some portion of the buydown. Aspects like the borrower’s credit score and what type of mortgage they’re using will affect whether they’re offered a temporary buydown, she adds.

A temporary buydown can be a good option, but you need to be aware of the risk when the rate resets. “In general, buydown loans tend to end up at a much higher rate than what you’re going to get for a straight fixed ,” says Jeff Lazerson, President of Mortgage Grader, a mortgage brokerage in Laguna Niguel, California.

Still, they can be a shrewd move when mortgage rates are rising. “Right now the timing might not be too bad, as long as it’s a lender or builder-paid buydown,” Lazerson says. If mortgage rates fall in the next year or two, the buyer could refinance to a better rate after the buydown ends, he adds.

The pros of borrowing from a builder

1. Good interest rates

A big reason a borrower should consider borrowing home builder financing: cheaper loans. Pulte, for instance, is one of the nation’s largest home builders with their own mortgage company — Pulte Mortgage. As of this writing, Pulte is offering a 30-year fixed rate mortgage with an interest rate of 5.5 percent and an annual percentage rate (APR) of 5.69 percent. That interest rate is 1.62 percent below the current national average.

2. Home upgrades

One benefit of working with a preferred lender is you may be able to more easily upgrade the home. “The builders will allow you to finance improvements into the loan,” says Lazerson. The best reason to go with builder financing is when you want a significant amount of extras or customized features — such as top-of-the-line kitchen appliances or specialty flooring — but don’t have the money, according to Lazerson.

Because builders can pay for materials and labor at a reduced rate, the upgrade could be negotiable if you go with their preferred lender. You could get a better deal on a mortgage with an independent lender, but you’ll have to pay out of pocket for your own upgrades or take out a home renovation loan.

3. Streamlined mortgage process

Since builders work closely with a specific lender (or they’re owned by the same parent company), they can have more confidence that the loan will close if the borrower is approved. Builders don’t want to have a sale fall through at the last minute due to a hiccup in underwriting.

Every extra day they keep a finished home on their books is costing them, not only in taxes and maintenance, but in opportunity cost as well. With a preferred lender, the lender and the builder have strong reasons for the process to go smoothly. The builder benefits from selling the house and the lender benefits from the continued referral business. And of course, you the buyer could benefit from a faster and easier closing. It’s not guaranteed that you’ll get approved, of course, but your relationship with the builder certainly won’t hurt.

The cons of borrowing from a builder

1. Higher fees and costs

Going with a builder’s preferred lender can cost you more than going with an independent lender. “When you’re having to split your profits three ways — between the mortgage company, the builder and the loan officer — you just mark up the loan more because everyone’s got to get paid,” Lazerson says. That means a higher interest rate (after a buydown ends) and more fees.

Also note: for using their preferred lender, builders may throw upgrades like nicer flooring in for free. But, what they don’t tell you is that they inflate the value of these perks, according to Lazerson. “I don’t remember one time that a builder deal was cheaper than what the consumer could get through the mortgage broker,” he adds.

2. Stricter qualifications

To take advantage of some financing deals, you may have to meet stricter guidelines. For example, Pulte’s advertised APR of 5.69 (mentioned above) isn’t for everyone. The minimum credit score is 780 and you have to put at least 20 percent down. This rate is based on purchasing a $500,000 home. That means a minimum $100,000 down payment. The national median down payment for Q1 of 2023 was $24,100, according to Realtor.com. So, to qualify for this specific reduced APR, you’ll need to make a down payment that’s four times the national median down payment.

3. Limited choices

If you want to get discounts or other benefits from financing through a builder, you may be limited in the house you can buy. Obviously, it’s got to be one of the developer’s — and not all builders and lenders work in every area. Also, with some builders and preferred lenders, the discounts their offering may only apply to already-built homes in specific communities. If you want a different house or a different location, the discount may not work for you.

Should you use home builder financing?

It’s important to know that builders can’t require you to use their preferred lender. It’s just another option for buyers. “Asking the correct questions to the lender and the builder is really important,” says Zuzek. You want to know what to expect in terms of timeline, discounts and fees. And read the fine print on any and all incentives.

And, while going the preferred-lender route is certainly convenient — like getting an auto loan at the car dealership — studies show that shopping around saves money for mortgage-hunters. You should compare new construction mortgage rates from three different lenders, at least.

That way you’ll be able to make an educated decision as to whether the builder’s loan offer, with all its enticing incentives, is the best way to finance your new home.

Source: bankrate.com

Apache is functioning normally

August 25, 2023 by Brett Tams

The chief executive of the National Association of Home Builders reportedly wants a government program launched to lower interest rates on home loans to 2.9 percent, along with an expanded homebuyer tax credit.

With these two initiatives in place, NAHB boss Jerry Howard believes the glut of unsold housing inventory could be off the market in six to 12 months.

He believes 4.5 percent mortgage rates aren’t enough to really stimulate housing, as evidenced by recent builder promotions that have done little to stem flagging sales.

Of course, such a program would only be available to first-time homebuyers, and not those currently struggling to keep up with their monthly mortgage payments.

And though mortgage rates have fallen to their lowest levels in years, many existing homeowners are still struggling to find affordable refinancing options, thanks to issues like negative equity and harsher underwriting requirements.

Many more are facing foreclosure, in the very same sprawling, overpriced developments homebuilders have aggressively pitched over the last few years.

So why is it that the homebuilders want even lower rates? Is it for the long-term health of current homeowners (pricing stabilization) or simply a bad excuse to put more Americans in their homes in an effort to reduce losses from stagnating inventories?

But why put even more people in a bad situation? Maybe home prices are, dare I say, inflated still, despite recent depreciation.

And perhaps high interest rates aren’t the issue, especially when they are, at present, historically low.

Source: thetruthaboutmortgage.com