No segment of the U.S. economy has been so battered and bruised by the prolonged recession as the housing industry. Today, however, leading indicators show positive trends. Along with the housing recovery, the Federal government has mandated new mortgage financing rules that take effect through 2013 and beyond.
Building or buying any home now involves revised guidelines that touch nearly every aspect of the financing process, including appraisals, disclosures of terms, closing costs, and qualifying financially. For those considering the purchase or construction of a log home, these reforms directly impact the budgeting process during construction and with permanent financing.
“The main difference now is that the borrower must come up with a larger equity position and can only borrow from 75 to 80 percent of appraised value, although this may vary from institution to institution,” explains John Batzer, director of dealer development and sales for Golden Eagle Log Homes. “Two things are extremely important, equity position and ability to repay. During the last three years particularly, some people have been removed from the group of eligible buyers—at least temporarily.”
At Golden Eagle, sales advisers take a consultative approach, asking buyers if they intend to seek financing and then managing an affordable turnkey project. Batzer urges consumers to get prequalified and consider potential equity sources, such as land that is paid for or short-term borrowing from a retirement plan.
“In some cases, people may determine that they need to scale back and put off finishing their bonus room or detached garage,” he comments. “They may complete 80 percent of what they originally wanted until some time after they get into their home. We urge people to get prequalified and use good information that is available on the internet, such as calculators to estimate their monthly payment, and budget accordingly.”
At StoneMill Log Homes, vice president of sales and marketing Mathew Sterchi sees a potential narrowing of budget options for consumers looking for the one-stop shop. New Federal guidelines restrict the total fees such providers may collect to three percent of the transaction amount. Many comprehensive providers, offering budgeting, construction, financing, and closing to include title insurance and other items, may not be able to turn enough profit to sustain their businesses.
“The new rules discourage growth from a business standpoint and encourage competition, which is good for the consumer,” explains Sterchi, “but now a consumer must find a one-stop shop that provides these services for three percent or find each of these services individually.”
New underwriting guidelines generally require consumer debt ratios that demonstrate ability to repay, capping overall monthly debt service at 43 percent of income. (Overall monthly debt service generally includes payments on mortgages, auto loans, any other installment debt like student loans or personal loans, and revolving debt (credit card) payments. Things like groceries, insurance premiums, and utilities would not ordinarily be included in calculating this ratio.) Consumers who understand their finances thoroughly will find an easier path to loan approval.
“I think the 43 percent cap helps consumers and protects them from getting in over their heads,” notes Sterchi. “Once we know what a customer wants and what they can spend, we can direct them to the right square footage, style of home, specifications, and price range.”
Along with the firm foundation of budgeting comes the requirement for verification. Providing accurate records, such as bank statements and tax returns, speeds the lending process along.
“Our customers are telling us that banks are asking for more documentation and that multiple and duplicate requests during underwriting can be frustrating,” remarks Jan Koepsell, managing partner of Expedition Log Homes. “Log home owners, in general, have excellent credit and financial resources. Many have either purchased or built a conventional home during the time leading up to the housing bubble. Their experience was with quick turnaround time and easy lending standards. Often they are surprised and don’t plan for the length of time and documentation needed to get their financing in order.”
According to Koepsell, new appraisal guidelines often require that the report be no more than four months old. Since construction typically requires six to nine months or longer, a second appraisal may be necessary to complete financing. In the event that a final appraisal yields a lower value than anticipated, cash reserves to bridge any loan-to-value gap are increasingly important.
Depending on individual perspective, new log home financing regulations may exert a positive or negative influence on budgeting. Nevertheless, industry professionals stand ready to help.
“Experience tells us that the people who have a passion for log homes are going to fulfill that dream—even if the financing process takes longer,” Koepsell observes. “When you are sitting in front of your fireplace surrounded by the beauty of your log home, any frustrations become distant memories.”