As alternative lenders proliferate, builders develop financing units

Lately, new home sales have been on the rise. In the first 11 months of 2013, 402,000 new homes were sold across the country—18.2 percent more than the previous year, according to an article on Market Watch. Average prices have also risen by 17.1 percent.

This is largely the result of a growing economy. According to the U.S. Housing and Residential Mortgage Finance outlook for 2014 published by Standard & Poor's, there is only a 15-20 percent risk of recession in the coming year. And the firm noted that housing forecasts look particularly strong.

While this is good news, builders are still facing financial pressure. One of the problems is that high-end home sales still remain low, partially due to difficulties buyers are having with securing loans. The news source noted that, in many cases, this is largely because lenders are paying closer attention to risks related to the new buildings themselves when processing applications. They will notice, for example, if builders do not have their finances in order, or if too many units have been built and not enough are selling.

At the same time, interest rates on 30-year, fixed-rate mortgages are increasing, further squeezing the pool of potential borrowers. In addition, Dodd-Frank financial regulations are doing their part to restrict the availability of mortgages, since lenders are required to adhere to stricter standards for managing risk and must be more selective when it comes to issuing loans.

What are builders to do? Playing a larger role in credit application processing may be a key way for them to increase the number of homes they are able to sell. Market Watch noted that these firms have sought to use financing referrals to make it easier for their prospective buyers to secure loans and make purchases.

According to the news source, under this system, a builder's financial arm approves the property, then refers buyers to a bank that has also had a chance to see the real estate. The end result is that buyers tend to qualify for their loans in much less time. In some cases, builders are even able to arrange services such as offering lower down payments to borrowers who choose to work with their lending arms.

It is true that builders generally do not have the same experience with application processing that banks have. Since they may not have established lending practices, they may have a particular need to use risk management software to judge the creditworthiness of potential buyers.

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