In today’s market, balancing affordability for buyers with maintaining your profitability is no easy task. Rising interest rates have left many buyers on the sidelines, and price reductions aren’t always the best solution. That’s where Builder Forward Commitments come in—a strategy that lets you secure better financing rates for your buyers, keeping them engaged without sacrificing your bottom line.

What Are Builder Forward Commitments?

A forward commitment allows builders to lock in an interest rate for future home closings, offering buyers below-market rates without lowering the sale price. The result? You preserve your margins while making homes more affordable for buyers.

Key Advantages:
  • Attract More Buyers: By advertising rates lower than the current market, you draw in more potential buyers—especially those sensitive to rising rates.
  • Maintain Sales Prices: Unlike price cuts that can harm your brand and overall profit margins, forward commitments allow you to offer affordability through financing rather than discounts.
  • Expand the Qualified Buyer Pool: More affordable financing options mean more buyers qualify for loans, helping you move inventory faster.
  • Flexibility with Unused Commitments: The commitment can be extended, providing you with more flexibility in managing timelines and preventing the cost of unused commitments.
  • Regulatory Compliance Benefits: The cost of a forward commitment isn’t considered an interested party contribution, giving builders additional flexibility to offer other credits if needed.
Why Forward Commitments Matter Right Now

Rising interest rates have made affordability the biggest challenge for many buyers. Instead of lowering your asking price to accommodate buyer budgets, you can offer them a more attractive financing option through forward commitments. This approach protects your profit margins while offering a compelling incentive for buyers to act now.

For example, paying $15,000 to lower a buyer’s interest rate to 5.5% can be more effective than a $75,000 price cut, saving buyers significantly on their monthly payments without affecting your price point.

Risks and Pitfalls to Watch For

While forward commitments offer significant advantages, there are risks that builders need to be aware of to avoid unexpected challenges:
  • Market Rate Fluctuations: If interest rates fall significantly after you've locked in a forward commitment, the below-market rate may no longer be competitive. Ensure you include a rate float-down option, so buyers can take advantage of lower rates if the market improves.
  • Upfront Costs: The initial cost of securing a forward commitment can be substantial, depending on the size of the commitment. Plan your cash flow carefully, especially if you're using installment payment options.
  • Unused Commitments: Not all homes may sell during the forward commitment window. By extending the commitment, you mitigate the risk of paying for unused rate locks. Strategically align your sales and marketing teams to move inventory quickly.
  • Buyer Expectations: Once you advertise lower rates, buyers will expect to secure those rates. Be transparent about timelines and any limitations so buyers understand what’s required to lock in their rate.
  • Regulatory Compliance: Forward commitments come with legal and compliance considerations. Partner with a lender that understands the compliance landscape and ensures fair lending practices.
Flexible Solutions for Builders

Cornerstone Home Lending offers several flexible forward commitment payment structures tailored to your needs:
  1. Payment at Issuance: You pay the full cost upfront, and we handle the rest.
  2. Payment at Closings: Pay part upfront and apply the remainder as homes are sold.
  3. Flexible Payment as Commitment is Filled: Manage your cash flow by paying in smaller installments over time.
Contracts are available for 60 to 270 days, allowing you to choose a timeline that aligns with your sales strategy.

The Bottom Line

Forward commitments allow you to stay competitive, boost affordability for buyers, and close more deals—all while preserving your sales prices and profit margins. In a market where affordability is key, this is the solution that helps you stand out from the crowd.

However, to maximize the benefits of forward commitments, it’s critical to be aware of the risks and manage them effectively. By planning ahead and partnering with a knowledgeable lender, you can enjoy the rewards of this strategy while minimizing potential pitfalls.
 
With over 35+ years of being a premier lending partner and experience in working with the top 100 builders, Cornerstone Home Lending and Lonnie Jenkins can service all your forward commitment and mortgage needs at 303-513-1915 or Ljenkins@houseloan.com.