Credit Unions Hold Opportunities for Builders
When I think about the great work that members of NAHB do for their communities, I can’t help but feel it encompasses more than just constructing homes. NAHB members are giving people life-changing opportunities — opportunities to fulfill their hopes and realize their dreams. Many of these people, particularly those with moderate and low incomes, would be unable to have these opportunities without the efforts of NAHB members.
This is why I feel there is a special kinship between NAHB and the National Association of Federal Credit Unions. Our organization is constantly striving to empower people of modest means by advocating for the federal credit unions that serve them. These federal credit unions enable moderate- and low-income Americans to achieve financial goals that otherwise may not be obtainable. Through federal credit unions, consumers have access to a multitude of low-cost financial services, such as first-time home buyer programs, welfare-to-work, used auto loans, financial counseling and more.
The Unique Nature of Credit Unions
Of course, it wasn’t always easy for people of modest means to gain access to financial services. During the Great Depression, commercial banks often closed their doors to everyday Americans with limited resources. Credit unions came about so that all Americans –– not just the wealthy –– could have a financial institution dedicated to meeting their specific needs. When Congress passed the Federal Credit Union Act in 1934, these institutions could be chartered anywhere in the U.S.
Since that time, credit unions have continued to grow and expand, yet always remained true to their original purpose. From the very beginning, credit unions have been not-for-profit organizations that are owned by the same people they serve: their members. This unique structure has allowed each credit union to be controlled democratically and has enabled them to typically offer lower rates on loans, higher rates on savings and fewer fees and service charges on the same services offered by banks and other types of financial institutions.
All of these characteristics help underscore the unique nature of credit unions and the importance of their existence. Now, more than ever, consumers need the kind of low-cost financial services that credit unions provide. With wages unable to keep up with the rising cost of homeownership, it is no wonder that the National Association of Realtors® recently reported there were fewer first-time home buyers in 2005 than there were in 2004. The good news is that home builders and credit unions are in a unique position to assist more people with becoming home owners.
AD&C Lending Services
Though it is clear that home builders and credit unions have much to gain by working together, the sad reality is that, most of the time, they don’t. When NAHB asked its members in a recent quarterly survey where they go to obtain land acquisition, development and construction loans, more than 90% said they work with commercial banks and thrifts. (80% alone said they obtained loans from commercial banks.)
When I first came across this data, I wondered how many builders know that many credit unions offer AD&C lending services, and that the rates on these services tend to be better than what banks offer. I also wondered how many builders were using banks merely out of habit –– could it be that the idea of working with a different kind of financial institution had never occurred to them?
Not only are there many credit unions that offer AD&C loans, but there are some that have established special partnerships with builders in their community. For example, Air Academy Federal Credit Union in Colorado Springs, Colo. offers a special cross-promotional service for builders called the Prime Partner program. Through this program, members of Air Academy FCU who have a lot loan and are planning to build a house are given the names of builders who are Prime Partners. In exchange, these builders tell their clients about financing opportunities through Air Academy FCU. The partnership has resulted in several builders using the credit union for all of their member-financing needs.
Utah Community Credit Union in Provo, Utah also has a special arrangement with builders. It offers discounts off origination fees and other costs for builders who take out a long-term construction loan. The credit union has been so successful in attracting local builders that some small community banks are now offering similar deals.
Options for Smaller Credit Unions
Some builders may wonder if credit unions –– particularly smaller ones –– would be capable of handling an increased demand for housing production financing if more builders were to become credit union members. While the continued growth and expansion of many credit unions that offer AD&C loans indicates that these cooperatives are well-suited for new business opportunities, there are options for smaller credit unions that may need assistance with processing large numbers of construction loans.
For example, some credit unions have partnered with The Construction Loan Company, Inc., a full-service mortgage and construction loan lender, to expand their product offerings and ease the loan writing process. CLC, based in Howell, Mich., does business in Michigan, Colorado, Florida and North Carolina, and offers a specialized, “hands-on” approach to construction lending. This enables the credit unions they work with to offer builders a comprehensive financing program that includes an understanding of how construction draws need to be disbursed from a builder’s perspective.
CLC’s construction-to-permanent loan program has become increasingly popular with builders over the past few years. Through this program, builders can offer a complete home package (lot and house) to their clients as a single product with only one set of closing costs. Typically, three separate sets of closing costs would be required when a client needs a lot loan, construction loan and mortgage loan.
Aside from convenience, the main advantage of this type of loan is price. Not only is there one set of closing costs instead of three, but the interest rate on the mortgage locks in on the day of the close, before construction begins. On other types of construction/mortgage loans, the interest rate does not lock in until 60 to 90 days before the home is completed and there are no guarantees as to what those rates will be during the time it takes to build the home.
While some banks also offer construction-to-permanent loan programs, the CLC loan is unique in that builders who are selling lots they already own do not have to wait until the home is built to get their money back. CLC pays builders upfront at the closing, thereby enabling builders to have financial flexibility to purchase supplies and to hire staff to start construction.
Also, banks often require 20% equity or a downpayment equal to that on a small- to medium-size construction loan, which forces many builders to sell homes in order to obtain the necessary capital to start building new homes for their clients. Credit unions that partner with CLC do not require this. Instead, they offer several low- to zero-downpayment options to prospective borrowers, which makes financing terms much easier for the builder and the client.
Joining a Credit Union
There’s no question in my mind that credit unions are ideally suited to serve home builders, especially considering that most NAHB members are small businesses. Over the last few years, more and more credit unions are offering small business loans through the Small Business Administration's 7(a) lending program. Now that credit unions of any charter type are eligible for SBA lending, they can offer builders an even greater array of low-cost lending products to choose from.
With all the benefits that come to those who are credit union members, you may be wondering how builders can join a credit union. While membership is not open to the general public, it is open to individuals who share a common bond as defined by law and regulation. A common bond may include a person’s place of work; the community in which he or she resides, works or worships; or a family tie to a credit union member.
For example, builders in Utah are eligible to join Utah Community Credit Union if they live or work in Wasatch, Juab, Sanpete or Utah county, or are related to someone who is a member of the credit union. Once builders identify a credit union they are eligible to join, an application must be filled out and submitted, and the builder must be willing to purchase at least one share (typically $5) of the institution. Once approved, the new member has full voting rights and is an owner of the credit union.
With more than 9,000 credit unions in the U.S., it is simple for builders to take advantage of the products and services that a credit union membership provides. But ultimately, credit unions and builders offer more than just improved business prospects for one another. They offer opportunities to improve the quality of life for those in their communities. By working together, credit unions and home builders can foster an environment where all people –– including those of moderate means –– can witness their dreams coming true. It is my sincere hope that NAFCU and NAHB will be bold in seizing this wonderful opportunity of creating better economic opportunities for the people we serve.