Today’s market is seeing rising interest rates and buyers who are currently unable to afford as much home as they could last year. Real estate agents are always looking for ways to help their buyers win, even in a changing market.
A great lending partner is aware of what real estate professionals go through in order to get a loan to close or to get their buyers qualified.
It is important to establish a relationship with a lender partner in your community to help guide and navigate you through the market.
Middleton Elite Coaching’s co-founder Debbie Lariviere is joined by Barry Horvath, a lending professional with The Mortgage Firm Trinity in the Tampa, FL market. In this article, Barry discusses creative, alternative lending and financing options that you may be able to explore with your buyers.
The Current State of The Real Estate Market
In today’s market, appraisals are very rarely coming in at value and appraisal appeals are a consistent battle for many real estate agents.
There is currently low inventory and high demand, meaning sellers can command a higher price for their homes.
One of the creative lending options that Barry’s team offers to anyone whose appraisal is coming in short, is a buydown.
Scenario: Appraisal comes in below value
Creative Lending Option: – Buydown vs. Price Reduction
In a scenario where an appraisal comes in under value, many real estate agents will negotiate a price reduction of the home’s purchase price in order to meet the appraised value.
Did you know there may be a better option?
Here’s an example:
Let’s say your buyer is looking at purchasing a house for $350,000.
If a buyer were to put 20% down, they’d have a $280,000 loan.
For example purposes, we are going to use an interest rate of 6.625%.
The monthly payment would be $1,793 a month on principal and interest.
In this scenario, the appraisal comes in $10,000 short at $340,000.
If your buyer negotiated a price reduction with the seller and settled at $340,000, with a 20% down payment, for a loan amount of $272,000 at 6.625% interest, the monthly payment would be $1741, or about $50 lower than that of the $350,000 purchase price. In this scenario, $10,000 saved your buyer $50 per month.
What if, instead of taking a $10,000 price reduction, you spent $10,000 to buy down the interest rate? In Barry’s market, a $10,000 buydown would take the interest rate from 6.625% to 4.75%.
This would mean that the same $350,000, with a 20% down payment at a 4.75% interest rate would have a monthly payment amount of $1461. This is a cost savings of $332 per month over the $1793 payment with the 6.625% rate. The same $10,000 saved your buyer $332 per month in the case of a buydown.
Barry urges you to consider the buydown option when entering into a contract.
The Sky Is Falling!
No. It’s not.
When asked if he feels that the market is crumbling, Barry adds that it most definitely is not.
Basic economics dictates that in a time when many markets are seeing less than 1 month’s supply of inventory, supply and demand are king.
In Barry’s 24 years of experience in the mortgage and lending industry, history has shown him that a 6 month supply of inventory will give you moderate appreciation. While he doesn’t predict rapid double-digit gains at 30% or 40% year over year right now, he adds that when you have fewer than 1 month’s supply of inventory, the real estate market will not see a collapse.
The real estate market of today is NOT the market of 2008-2010
While many are comparing today’s market with that of the collapsed market of 2008, 2009, and 2010, Barry urges there are many differences. These differences make make this market nothing at all like the market of the mid to late 2000s.
The lending industry has many more safeguards and regulatory practices in place today that it did not have in 2008.
Gone are the days when a real estate professional or a lender could call an appraiser and determine what number the appraised value must meet. In fact, direct communication between the real estate professional, the lender, and the appraiser is currently not allowed.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 assured this.
Scenario: Interest Rates Are Impacting Your Buyer’s Affordability
Creative Lending Option: Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a loan in which the interest rate may change periodically, usually based upon a pre-determined index. The interest rate begins lower than that of a fixed-rate mortgage and increases over time. An ARM may be an option for the buyer who plans to be in their home for a short period of time such as 3-6 years.
An ARM is a strategic and creative financing option for buyers today who are planning to downsize, upsize, or relocate in the relatively near future. An adjustable-rate mortgage may allow your buyer to enjoy a lower monthly payment now and refinance later.
Every market has a cycle the same way interest rates have a cycle. If you took a 7 yr ARM, you could potentially come out on the other side at seven years, refinance into something a little bit lower, or sell your house a little bit higher because of the gradual appreciation we’ve seen across the last seven years.
For the buyer who is familiar with the previous subprime 2/28 and 3/27 ARMs, the ARMs available today are much different. There are no pre-payment penalties on current ARMs sold through Fannie Mae and Freddie Mac, which is much different from the ARMs of years past.
With today’s adjustable-rate mortgages, if interest rates come down, you can refinance.
More Purchasing Power
Real estate is bought and sold every day. If a buyer has a need to purchase a home, they are going to purchase a home; even in today’s market.
An ARM might be a great option for your buyer to consider if they are looking for more purchase power. If your buyer is looking at a $400,000 max purchase price, maybe they’ll qualify for $425,000 or $430,000 with a creative lending option such as an ARM.
This is especially true for the real estate agent who has been working with a buyer over the last 12 months who couldn’t get into a home because of multiple offer situations and low inventory. Your buyer may have decided to hop back in the game because there are fewer offers being put in right now, and they are finding that due to rising interest rates, they can’t afford as much as they could when they began their search. Now they’re getting requalified and are realizing that when they got that first prequal, it was based on 3.25%, and they could afford $500,000. And now, based on today’s rates, they may have had to back that down. If they don’t like what they see at $425,000, that’s where an ARM could possibly get them into that $450,000 orb pricepoint and find more of what they want.
It’s very valuable to our buyers.
Maximum Purchase Price vs. Maximum Payment
Many borrowers do not understand the difference between their maximum purchase price and their maximum payment.
Every lender qualifies a borrower based on the maximum payment they can afford, not the maximum purchase price.
To calculate the maximum payment, many lenders will have to roughly estimate the taxes, insurance, and other monthly fees that come into play, such as HOA fees.
A great tip is that if you know what your buyer’s taxes would be, you know what the HOA payment is, and you’ve obtained an insurance quote, it is helpful to provide those figures to the lender so that they can help determine the most accurate maximum payment that your buyer can afford.
How Considering Max Payment Can Help Your Buyer Make a Smart Investment
Barry adds that he is seeing a lot of buyers considering manufactured housing or condominiums as perceived lower-cost options. He says this is so because they are simply looking at the purchase price and not the monthly payment.
For example, Barry says that if a buyer sees a manufactured home or condominium with a purchase price of $250,000, it is important to consider looking at the whole payment.
This buyer may be paying a point and half higher interest rate because it’s a manufactured home or condominium. Additionally, insurance rates for manufactured housing and condominiums are typically higher.
He urges you to ask your buyer:
“Do you want the lowest purchase price or the lowest monthly payment?”
If the lowest payment is a priority for them, they may want to consider a single-family home instead of the manufactured home or condo. A single-family home will likely be financed at a lower rate, have a lower insurance cost, and will have more appreciation.
In the case of condos; on top of taxes and insurance, you’ll have HOA fees. And in our scenario, the same buyer can afford a single-family home for the same monthly payment they would pay for a condo with HOA fees tacked on top.
It all comes down to being strategic and helping your buyers get into the most home for their money.
Scenario: Buyer wants to purchase a home at a higher purchase price
Creative Loan Option: Combos vs. Jumbos
A combo loan is a creative lending option for a buyer who is looking to buy in a jumbo market. A Jumbo market is a price point that exceeds the limits set by the Federal Housing Finance Agency (FHFA). The guidelines for qualifying for a jumbo mortgage are much more stringent than a conventional loan.
Additional documentation is required for approval for a jumbo loan such as 3 years of tax returns instead of 2. The lender will also require documentation on any investment properties. For jumbo loans, interest rates are higher and credit score requirements are more strict.
These types of loans are not purchased by Fannie Mae and Freddie Mac; they are portfolio loans typically held by a bank. They are a higher risk to the lender, therefore the requirements are more stringent.
A prudent strategy may be to do what is called a combination mortgage, or a Combo Loan. A combo loan is two separate mortgage loans granted by the same lender to the same borrower. Combination loans can fund the construction of a new home or purchase an existing property. Choosing a combination loan may allow borrowers to avoid paying private mortgage insurance (PMI).
An example scenario is that your buyer is looking at a $1M property and has $200,000 to put down, requiring financing for $800,000. If the conventional loan limits are roughly just above $600,000; this would put your buyer in the Jumbo market.
A combination loan would be where you take a secondary loan, like a HELOC (Home Equity Line of Credit) or a second loan, and piggyback it with a first loan. In this scenario, your buyer may have two loans, but they could have a lower monthly payment.
Even if you don’t work with buyers in the jumbo price point based on your area, it is helpful to understand this so that when your buyer comes to you and asks about a jumbo loan, you’ll know whether or not it is truly a good option.
Scenario: Self-Employed Buyer Looking to Obtain Financing
Creative Lending Option: Bank Statement Loan
When the housing market collapsed in 2008 – 2010, the Dodd-Frank Act was written to protect consumers and avoid another crisis.
The Dodd-Frank Act (which is 848 pages long) simply states that the borrower must prove the ability to repay.
For real estate professionals and self-employed people who currently write off much of their income, it may be difficult to obtain financing.
Barry says he works with many self-employed individuals in this scenario. Take the example of the real estate agent who states their annual income is $200,000 although their tax returns show a net income of $30,000. This is because they took $170,000 in write-offs. The only income that can be counted in that scenario is $30,000.
The self-employed buyer has alternative options such as a Bank Statement Loan.
A bank statement mortgage allows eligible self-employed borrowers to use bank statements to help verify income instead of tax returns.
With a bank statement loan, lenders will take 12 or 24 months of bank statement deposits and add them up to come up with a factor for basic expenses. And they’ll actually count that as your income. For the real estate professional who writes off everything, you still have an opportunity to buy a home.
This loan type will typically see a higher interest rate, however, you will be able to get into a home with a great loan and a great option for the type of buyer that doesn’t show a lot of income on their tax returns.
A bank statement loan is also a great option for the buyer who is two years out of bankruptcy, two years out of a short sale, or two years out of a deed-in-lieu.
It’s advantageous to become partnered up with a lending partner who is well-versed in creative lending options such as these.
Weighing Out The Creative Lending Options For Every Scenario
Creative lending and financing options are a great opportunity for many people who are looking to get qualified in today’s rising interest rate market.
Will every scenario be the same for every borrower? No. It is important to weigh out your buyer’s needs before deciding on a loan option.
The amount of down payment your buyer is willing to make will determine whether or not they pay PMI (private mortgage insurance).
If your buyer is putting down less than 20%, they will pay PMI, which is a fee the lender charges to protect themselves as part of the loan.
PMI varies with credit scores and other factors. However, it is an added monthly expense that should be considered. If your buyer was planning to hold onto some cash and only put 15% down, you may want to evaluate how much the extra 5% down will save them by not having to pay PMI.
A Good Reason To Reconnect With Past Buyers
Debbie adds that home appreciation as it relates to PMI is a great reason to reach out to buyers who purchased a home two or three years ago that may have made a down payment less than 20%. With the amount of appreciation that we’ve had since they purchased, it would be a great reason to give them a call to suggest they could have their PMI removed with a new appraisal.
If they didn’t put 20% down, check in with them to see if you have a reason just to talk to them and bring value.
Final Thought
In Barry’s opinion, real estate is the best investment anyone can make in their lifetime. Because everyone needs to live somewhere, you might as well buy an appreciating asset.
When it comes to purchasing a high-consideration appreciating asset, there’s something to be said about having a relationship with somebody who knows you and knows what’s important to you, and can help you navigate in this market. A trusted real estate professional and a trusted lending partner can make all the difference.
If you’d like to contact Barry Horvath with The Mortgage Firm Trinity, he can be reached at 727-934-9348 or online at www.closemyloantrinity.com
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