As property values fall nationwide and lenders put more scrutiny on borrowers, more of your customers may get turned down for financing from first-tier lenders such as Wells Fargo or Bank of America. But that doesn't have to put them out of the game. Second-tier, or “subprime,” lenders specialize in loaning money to people who first-line lenders reject. A relationship with one or more of these companies, along with a system for managing the sales team and the homeowners, can often save the sale.
Matt Hines, president of American Eagle Builders, an exterior contractor in Arlington, Texas, says that working with a subprime has been a boon to his company. “About 40% of our customers get turned down [for conventional financing],” he says. In the past, most of those customers were lost, Hines says, but that changed after he started working with HomePlus, a subprime lender based in Los Angeles. “About 80% of our customers now get financing. They finance a lot of the deals we used to lose.”
Interest rates for these customers are higher than for someone with good credit, but since the loan is usually secured by a second mortgage on the property, the rates are still lower than for a credit card or an unsecured loan. HomePlus president Bill Simone says that his company's rate for a secured loan is 10 points over a Treasury bill with a comparable term. So if T-bills are offering a 4% return, he charges an interest rate of 14%. By comparison, someone with good credit would pay in the 9% to 10% range.
In most cases, the second-tier lender will make a decision within a few hours, but the paperwork can take longer. “The only thing we need before making a decision is a signed application and a copy of the work order,” says Butch Dickson, president of Community Home Financial Services, a subprime lender based in Jackson, Miss. But, he adds, completing the loan can take several days. “We have to perfect our lien [on the property] and document the customer's income,” he says. The lender has to order a copy of the house title, and the customer has to fill out the same forms and provide the same documentation as for a first mortgage: paycheck stubs, bank statements, etc. Then they have a three-day right of rescission.
Of course it's a well-known sales adage that time kills deals, but some contractors find that customers with bad credit are less time-sensitive. “They're not likely to cancel during the wait period because they know that they have problems and they understand how that has an impact on the process,” Hines says. However, everyone says that it's still important to get the buyer off the street as soon as possible. Simone says to figure that you have one shot at a primary lender and that you need to get them to a secondary lender as quickly as possible. If customers get impatient, he suggests keeping them engaged in planning the job. One way to do this is to send someone back to the house to review color sheets with the customer, or to confirm measurements.