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Custom Home Loans in the New Economy

Article by Brandon Cornett

For the majority of buyers, buying a luxury custom home also means taking out a mortgage loan. After all, few of us can make such an investment 100% out of pocket. So we turn to custom home loans to bridge the gap between what we can put down and what the property costs.

This brings up the topic of credit scores. Your credit will have a major influence on (A) whether or not you get qualified for the custom home loan you need, and (B) what kind of interest rate you get on the loan. These are important matters when purchasing a luxury custom home for the first time, so we will examine them more closely in this article.

Now, you might be saying: "Come on Brandon, this is Real Estate 101 here. I'm fully aware of the need to have good credit when applying for a home loan."

To which I would reply: "Yes, but are you aware of how much the credit and lending industry has changed over the last couple of years?"

If you are not aware of such changes, please read on. I'll explain how recent economic issues have changed the mortgage industry, and what it all has to do with the custom home loan you need to make your purchase.

Welcome to the New Economy

Recently, I was watching Jean Chatzky on the Today Show. She is the financial editor of that program, and she comes on from time to time to discuss financial matters. On this particular episode, Jean confirmed something I already knew (but backed it up with some eye-opening numbers).

Specifically, Jean was explaining the credit score you need to qualify for the best mortgage rates when buying a home. Here is how she broke it down:

  • May 2006 - Borrowers needed a credit score of 620 to get the best rates.
  • May 2008 - Borrowers needed a 760 or above to get the best rates.

That's an increase of 140 points, which is a significant difference when you consider that the overall credit range only goes from 300 - 850.

Of course, if you're a savvy home buyer who has been staying on top of the news, you probably know the reasons for this. The subprime mortgage fiasco that came to a boil in 2007 led to tighter restrictions on lending institutions, many of which went out of business altogether. Lenders today pay closer attention to credit scores when approving borrowers for custom home loans and when determining the interest rates on those loans, as shown by Jean Chatzky's breakdown above.

How It Relates to Custom Home Loans

If you plan to purchase a luxury home sometime in the near future, and you need to obtain a custom home loan to make it happen, these events directly relate to you. Getting a loan for such a home these days is more challenging than in the past, and getting a decent interest rate is also harder to do.

Here's the bottom line. If you plan to obtain a home loan for a custom home in the near future, you had better have a darn good credit score backing you up. If you don't, you could have trouble qualifying for the loan in the first place, and you certainly won't get the best interest rate on it.

Obviously, interest is relative to the size of the loan (the principal). So when you consider that custom homes cost more and require a larger principal loan amount, the issues of credit scores and interest rates become even more important. There is simply more money on the line, so the borrower needs to do more homework and be better qualified.

Right now, there are a lot of custom homes being foreclosed upon throughout the country. Many of these cases are the result of buyers who rushed into the purchase, without shoring up their own financial "house" first. They had bad credit, so the lenders charged them high interest rates. They took out ARM loans to lessen the blow of those rates, but that only works for the first few years. When the adjustable rate mortgage adjusts ... look out!

My Advice to Custom Home Buyers

My advice to anyone seeking a custom home loan echoes the advice you hear from financial experts in the media -- don't buy until you are ready. If you currently own a home and are thinking about upgrading to a custom built home, you are actually in a great position. If you can comfortably afford your current mortgage, there is no need to rush into anything.

So here's what I recommend you do before shopping for a custom home and applying for a loan to cover it. First, get current copies of your credit reports and scores (yes, you have more than one). See how your score stacks up against the national average and the figures presented at the beginning of this article. If your score is low, you should focus your efforts on improving it before seeking a custom home loan. Do this first, and you will have an easier time qualifying for the loan, and you'll get a better interest rate as well. And that means a smaller mortgage payment each month!

Good luck with your custom home experience.