Navigating the Mortgage Market – theMReport.com
This piece originally appeared in the June 2022 edition of MReport magazine, online now.
June is National Homeownership Month. While this is a time to celebrate homeownership and the benefits it brings to families, neighborhoods and communities, it’s also a time to examine the barriers that many homebuyers may face. .
It almost goes without saying that borrowers today struggle to buy a home. Prices are reaching new highs for many reasons. First, the demand for housing exceeds the available supply, which contributes to a sharp appreciation in home values. Additionally, rising labor and material costs, as well as supply chain challenges, have led to higher construction costs for new homes, so adding new inventory always poses a problem of affordability. Additionally, all-cash offers, institutional buyers, and frequent bidding wars drive home prices even higher — sometimes above asking price and even above appraised value — and drive up inventory. faster than some buyers can get around.
As if that weren’t enough, rising interest rates are reducing homebuyers’ purchasing power and rising inflation rates are reducing home affordability.
While this long list of challenges affects all buyers, it particularly affects first-time homebuyers. Some of them may not have enough savings and certainly do not have the equity in their home to help them in today’s hectic market.
However, whether it is a borrower’s first time buying a home or not, the lender is undoubtedly one of the greatest resources to help the borrower navigate through the rough seas until the desired destination of home ownership. Therefore, lenders need to be better prepared than ever to help borrowers address their affordability issues so they can realize their dream of home ownership.
Sharpen product knowledge to match shoppers with their most affordable option
One of the most important things lenders can do is hone their knowledge of all products. As guidelines develop and market changes affect the appeal of different products, it is important for lenders to understand the different options available to best meet the borrower’s mortgage financing needs, particularly the options which may be outside the norm or outside the lender’s usual comfort zone. . Today’s complex market requires some creativity on the part of the lender to find the right solution for each borrower’s unique situation.
Take adjustable rate mortgages (ARMs), for example. Due to rising interest rates, ARMs may be a better alternative to a traditional 30-year fixed rate loan for some borrowers. An ARM can help borrowers get a lower rate and therefore a lower payment for the initial fixed-rate term, whether it’s five, seven, or even 10 years. ARMs are great for borrowers who will likely sell their home during this initial fixed-rate period and are also great for those who expect strong earnings growth in these early years.
Lenders should also be familiar with their low down payment products that can help borrowers be affordable. There are a plethora of options that lenders should be familiar and comfortable with, such as the United States Department of Veterans Affairs (VA) loans, the United States Department of Agriculture’s Rural Housing Program, the Indian Housing and Urban Development (HUD) Section 184 Home Loan Guarantee, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs, standard 97% loan-to-value (LTV) products offered by Fannie Mae and Freddie Mac, and Federal Housing Administration (FHA) loans.
Additionally, there are state, city, and county Housing Finance Agency (HFA) programs that can provide down payment assistance, some as high as 5%. Portfolio loan programs offered by lenders or investors are another great option to help alleviate affordability issues. Since the lender sets the standards, portfolio loan programs can help borrowers who might have a lower credit score or little or no savings.
Of course, mortgage insurance products also provide borrowers with an affordable home purchase option. While some are paid monthly, others can be paid upfront. Some of these upfront options, such as a single premium paid by the borrower, can even be funded into the loan and will actually reduce the borrower’s payment without increasing cash-to-close. Split premiums present another option, requiring less upfront money than a single premium and, instead, a smaller monthly payment.
Another type of homebuyer assistance program designed specifically to help low-income families afford homeownership are Mortgage Credit Certificates (MCCs). The programs offer eligible homebuyers the opportunity to claim a dollar-for-dollar tax credit (up to $2,000 per year) for a portion of the mortgage interest paid.
This credit is available as long as the borrower lives in the home, so borrowers who want to stay in their home for a while can see significant savings with MCCs. If none of these options are enough to help a particular group of shoppers manage affordability, there are still other products that might hold the answer. Non-qualified (non-QM) mortgage products are a great solution for borrowers who might not qualify using traditional underwriting standards. And for homebuyers who are struggling due to inventory issues, a permanent building product or even a remodeling product could be the answer to getting a home that meets their specific needs.
Each borrower’s situation will be different. Some may lack savings while others have low credit scores or have affordability issues. Whatever the case, lenders should be aware of the variety of product options they can offer for the specific situations of different borrowers. There is no single product that will solve the affordability problem for everyone, but there are many products that borrowers can benefit from.
Once lenders become familiar with the wide options they are available to match borrowers with the products that best suit their needs, there are a few other things they can do to help borrowers get into the houses.
First, lenders need to set and manage expectations, especially in today’s home buying market.
Educating borrowers on their specific process will also help lenders prepare their borrowers on how best to navigate the home buying process. Be sure to provide borrowers with loan product and structure options, explain the features of those options, and outline the pros and cons so they can make an informed decision. Communicating clearly and consistently from start to finish makes a huge difference in ensuring high customer satisfaction and successfully getting borrowers into their homes.
Lenders should also work closely with referral partners and interested parties such as real estate agents and builders. Setting and managing expectations along with timely communications are key to creating a smooth transaction and increasing the likelihood of future referrals.
To strengthen a borrower’s negotiating position with a potential seller, it is essential that a lender obtains solid pre-approval. Once the borrower is ready to make an offer on a home, the lender can work with the realtor to ensure that the terms of the contract match the borrower’s goals and unique situation.
Lenders have vital information about the borrower’s financial situation that may not be seen on paper and this information can help the real estate agent make an offer that is not only affordable but also sustainable for the borrower.
To have an impact
Many factors continue to contribute to a tough market for homebuyers.
Lenders must be well prepared to match borrowers with the right product solutions to help them get into homes.
Education is essential for lenders, borrowers and referral partners.
In today’s market, it’s easy for buyers to count themselves before they even get started. However, knowing the options available to them can help borrowers access an affordable home so they can start enjoying all the benefits that come with home ownership.
Everyone in the industry has a role to play in helping to tackle the affordability issue. Whether you’re a lender, realtor, or builder, everyone has the power to help borrowers find an affordable path to homeownership, not just during National Homeownership Month , but for each month in the future.
The statements in this article are the opinions of Chris Garagusi only and do not necessarily reflect the views of Enact or its management.