Discovering Relocation Home Loans
To ease the process and the financial burden, most companies will agree topay closing costs. But the turnaround on getting the money to employees beforethe closing takes place can leave frantic home buyers scrambling at the lastminute to secure a check or back it up from their own accounts. Clever HRadministrators, however, can circumvent the chaos. They can channel theemployees' home loans through a national bank offering relocation loan programs.
Benefits of Special Loans
Relocation loan programs were designed specifically for companies that movemany employees and need a quick and painless process for getting them settled intheir new homes. Like typical home loans, the programs provide money to buyhouses based on employees' incomes. They also include additional perks that makeclosing on a house easier and, in some cases, will help the employee secure moremoney for a bigger house.
Most national banks offer the same benefits in their programs, says BobLevenstien, executive vice president of Forward Mobility, a Bernardsville, NewJersey-based relocation firm for small and mid-sized companies. When shoppingaround, you can expect to find the following:
Direct billing. The gem of the relocation loan is direct billing. Thismeans that the bank will advance all the money for the closing costs on a housethat the company is willing to cover. This usually includes title search costs,title insurance, inspection, appraisal, and loan application fees, whichtypically come to 2 or 3 percent of the purchase price of the home. The bankthen bills the company for that cost. "This is the single most importantfeature of a relocation loan, because it means the buyer only has to bring thedown payment to the closing table," says Steve Stein, executive vicepresident of national sales at CitiMortgage in St. Louis. It also eliminates thelast-minute scrambling by the employee for a check from the corporation to coverthese costs.
Credit for trailing spouses. Even if the employee's spouse has not yetgotten a new job, the lender will include the spouse's full income from the oldjob as part of the approved home loan.
Waiver of the application fee. "This is a marketing tool for banks tolure clients," Levenstien says. It cuts the closing fees by about $200.
Quick pre-approval. When home shopping in the new area, employees can callthe bank and within hours have an idea of the loan amount they will qualify for.In some cases, they can get quick pre-approval before they start shopping.
Preferred rates. Most banks advertise that they will give a percentagerate that is lower than the industry standard through their relocation loanprograms, Levenstien says. It's typically 1/8 to 1/2 percentage points, he says,but notes that those rates often can be secured through other loan programs.
Fast paperwork. "The buyer doesn't have to spend as much time talkingto the lender, documents are transferred more quickly, and there is less redtape," says Leo Foley, president of Horizon Relocation, a firm inNaperville, Illinois.
Consulting service on choosing the right kind of mortgage. Many lenderswill help the employee select the best mortgage based on the anticipated lengthof the stay in the new city and on the person's targeted career path, Steinsays.
Relocators Rarely Default
Why would banks bother to provide better interest rates and quicker approvalto relocating employees? They're a better risk than theaverage home buyer, Foley says. "The relocating customer is seen in abetter light than the typical buyer who wants to upgrade, so the loan packagehas more bells and whistles." Employees who relocate are typically gettinga raise, their employers obviously see them as a goodrisk, and they've got job security and a high salary. "The employers arewilling to invest in the employee, so banks are willing to invest in them aswell," he says.
Statistics show that the default rate among relocating customers is virtuallyzero, Stein adds. A percentage of the interest rate on every loan is a creditexpense for defaults, and in the case of people who are relocating, thatpercentage is zero.
Picking the Right Program
Since most major lending institutions offer relocation loan programs,choosing from among them isn't difficult. The place to start is at your own bankif it's national, Levenstien says. You have a relationship with the bank and caneasily add the relocation package to your existing services. Larger companieswill often sign on with several large loan institutions but give employees theoption of choosing among them, he adds. Stein warns people not to spreadthemselves too thin. If you use four or five or more lenders, no one institutionhas an advantage with your employee population. This can be a disincentive forthe lenders to give the best deal to transferees.
Foley advises HR managers to choose a relocation loanprogram on the basis of customer service. "It's a very competitive industry,"he says. "If you are only relocating one or two employees a year, theymight not get very excited about your business." He encourages his clientsto go to the bank that returns phone calls, that iswilling to streamline the process, and that will give them a specific accountrep who will handle every part of the relocation process for employees fromstart to finish.
"Some banks have great programs but no single rep for all nationalmoves," he says. This means you have to deal with a different person inevery city and there is less consistency in the service provided.
Stein suggests exploring the additional products that lenders are willing toprovide to those who are relocating and to other employees as a result of therelationship, including home-owner insurance, credit cards, andlow-interest-rate mortgage programs for non-relocating employees.
Regardless of which provider you use, secure the relationship and the loanprogram before you start relocating people. "When people are ready torelocate, they are in hurry-up mode," Foley says. "It takes time tobuild a relationship with a lender."
Make the program optional for relocators. "A mortgage is personal,"Levenstien says. "Some people don't want to share that with theiremployers."
Cheryl Sawicki-Ritchie, HR associate for Ford Motor Company in Dearborn,Michigan, says, "we offer our employees relocation loan services, but wedon't promote them or insist they use them." If Ford employees opt not touse the program, they get reimbursed for closing costs after they purchase theirhomes. But Sawicki-Ritchie thinks the loan program is a great idea. "Peopledon't realize how expensive closing costs are."
A Costly Loophole
When a company relocates an employee, not only does it typically pick upclosing costs on the purchase of the new home, but it also will pay realtor feesand extra closing costs on the sale of the old home. That comes to about 7percent of the home sale price. So, if an employee sells a $200,000 home, thecompany will pay $14,000, most of which goes to the real estate agent.
The IRS considers that $14,000 to be additional income and will tax theemployee for it at the end of the year, Levenstien says. To eliminate this taxburden to the employee, most companies will make additional payments to the IRSout of their own pockets through withholdings in the employee's name.
"It's an unnecessary cost," Levenstien says. "Companies wastea tremendous amount of money on relocation." The solution, he says, is tosell the house to a relocation firm. Most relocation companies provide home-sale programs to people who are relocating so thatthe employee doesn't realize any additional income, and the company isn't stuckwith the tax costs.
In this case, instead of selling the home directly to a buyer, the employeesells it to the relocation firm. This allows the seller to avoid the realtor feeand extra closing costs. The firm then sells the house to the buyer and pays thereal estate agent and additional costs, which it bills back to the employee'scompany. Because the employee officially realizes no income from the sale of thehouse through funds provided by the company for these fees, the employee can'tbe taxed for it.
Relocation firms typically charge corporations $1,000 to $2,500 for thisservice, Levenstien says. "Compare that to the average tax cost tocompanies of $7,500 to $15,000, depending on the cost of the house, and it's nota bad deal."
Workforce, April 2001, pp. 44-48SubscribeNow!