When Brian Kempf, a vice president and senior loan officer with George Mason Mortgage in Arlington, worked with a couple relocating to Bethesda from California, the prospective buyers thought they had to put down 20 percent on their $1 million property – a common misconception among buyers.
“The couple had a car loan and some credit card debt, but they had a lot of cash,” says Kempf. “I showed them that if they made a 15 percent down payment, they would have $50,000 they could use to pay off their debt, which would leave them with only their housing payment.”
The couple was grateful because their new financial picture gave them the ability to save more money, and their lower debt-to-income ratio earned them a lower mortgage rate.
“A lot of sellers and Realtors® see a big down payment as gold and think the person offering a down payment of 20 percent or more is the best qualified,” says Kempf. “But often, that down payment is there because it’s a gift or because the only way they can qualify for a loan is with a bigger down payment, so they borrow less. Sometimes the borrower with a 10 percent down payment is the best qualified.”
Whether your client is a young, first- time buyer with student loans and not much cash or a self-employed business owner with a complicated financial portfolio, you can find loan options to suit their needs – or at least a lender who can advise them on how to qualify for a mortgage in the future. Reach out to your lender contacts to learn about the specific programs they offer.
MORTGAGE ANXIETY
One of the best things you can do to help a prospective buyer is to organize a consultation with a trusted lender. Many would-be homebuyers think they can’t qualify for a loan because they assume their credit is too weak, they have too much debt or they don’t have enough cash. Those issues, depending on their severity, can be overcome with the right loan program and some solid financial advice.
“The good news is that lending is getting more flexible for all kinds of borrowers, including self-employed individuals and people with student loan debt,” says Patrick Cunningham, a mortgage banker and partner with Home Savings and Trust Mortgage in Fairfax. “Lenders are more apt to make loans today because we’ve had a few years of good loan performance and because the market is a little slower.”
Some buyers are anxious that higher mortgage rates will push their payments out of the affordable range.
“It’s important for buyers to talk to a lender and analyze their options,” says Cunningham. “Some buyers may need to recalibrate their budget because of higher rates, but most will still qualify for a loan.”
Connect your clients with a lender who can discuss all their options and calculate possible housing payments and cash needs before you help them find a home.
“If a borrower is having difficulty finding financing, it’s smart to have them talk to two or three different lenders,” says Marvin Stanger, vice president and senior mortgage lending officer with Chain Bridge Bank in McLean. “If they talk to different types of financial institutions, they sometimes can find a program that will help them, especially if they don’t fit into traditional guidelines.”
Buyers, particularly in a competitive marketplace, tend to focus on getting a preapproval letter for a maximum loan amount, but Kempf says he approaches a buyer consultation from a more specific point of view.
“I focus on the monthly payment, so people really know what they’re getting into,” says Kempf. “For example, if they’re paying $2,000 a month in rent and only want to spend $2,200 as a homeowner, I show them what that means including the principal, interest, taxes, insurance and HOA or condo fee. Sometimes they realize that they’re better off looking at a single-family home or townhouse because of a too- high condo fee.”
DOWN PAYMENT SCENARIOS
Many buyers say that saving for a down payment continues to be the biggest obstacle to buying a home, yet numerous low-down-payment loan programs are available. Conventional loans are available with as little as 3 percent down and Federal Housing Administration (FHA) loans with 3.5 percent. Some buyers may also qualify for a Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA) Rural Development loan with zero down.
In addition, many buyers qualify for down payment assistance programs, which are easily searchable at downpaymentresource.com.
VHDA homebuyer programs include homebuyer education and opportunities for first-time buyers for low-down- payment loans and a grant of up to 2.5 percent of the purchase price. In the Washington, D.C. region, VHDA loans are available for homes priced as high as $500,000 and income limits for the loan programs are $125,700 for a household with two or fewer people and $146,700 for households with three or more people. To be eligible for a grant, the household income limits are $100,500 for a two-person or smaller household and $117,300 for a household with three or more people. The program also includes a mortgage credit certificate that reduces federal income tax liability.
“Mortgage insurance is cheaper than it used to be for low-down- payment loans,” says Cunningham. “A lender can always run the numbers to compare an FHA loan and its mortgage insurance premiums with a conventional loan with private mortgage insurance (PMI) to see which loan is a better fit.”
"There are signs that lenders are becoming more flexible about qualifying borrowers compared to the period immediately after the housing crisis, and some guidelines have been loosened."
Traditional PMI requires a monthly premium until the loan- to-value reaches 78 percent and it automatically stops. Borrowers can also request to drop their PMI when their loan-to-value reaches 80 percent. FHA borrowers must pay mortgage insurance for the life of their loan.
“Lender-paid PMI is another option,” says Stanger. “In that case, borrowers pay a slightly higher mortgage rate, and the lender pays their PMI upfront. The borrowers will pay that slightly higher rate until they pay off the loan, but their payments will be lower than if they were making monthly PMI payments. There are pros and cons to every scenario, so it’s worth comparing all your options.”
NEW GUIDELINES FOR QUALIFYING BORROWERS
While 71 percent of all closed loans were for borrowers with a credit score of 700 or higher in October, according to Ellie Mae’s Origination Insight Report, that means nearly 30 percent of borrowers had a FICO score of less than 700. There are signs that lenders are becoming more f lexible about qualifying borrowers compared to the period immediately after the housing crisis, and some guidelines have been loosened.
• Loan limits up. The maximum conforming loan limit for mortgages acquired by Fannie Mae and Freddie Mac in high-cost housing markets, such as the Washington, D.C. metro area, has risen to $726,525. This means fewer buyers will need to apply for a jumbo loan to finance their purchase. While jumbo loans have similar interest rates to conforming loans, they typically require a higher down payment and a stronger credit profile than conforming loans. In high-cost areas, the new FHA limit for 2019 will increase to $726,525, up from $679,650. The new loan limits took effect Jan. 1.
• Debt-to-income ratios. Debt-to- income ratios, which compare a borrower’s minimum monthly payments on all debt with their gross monthly income, can be as high as 50 percent or more, depending on the loan program.
“If you have good credit or make a bigger down payment, you’re more likely to be approved with a high debt-to-income ratio,” says Cunningham. “Until recently, lenders were okay with a 50 percent ratio, but now even mortgage insurance companies have raised their acceptable ratios to that level.”
Borrowers with plenty of cash reserves, a lot of home equity and a previous mortgage with a perfect record of payments are good candidates for an approval despite a high debt-to-income ratio, says Stanger.
“Sometimes the lender also is aware that there’s another source of income from someone in the household, such as a spouse who is not on the mortgage application, which gives the loan officer more confidence that they can handle the mortgage payments,” says Stanger.
• Student loan payments. Streamlined guidance was provided in 2017 by Fannie Mae and Freddie Mac about how lenders can use student loan payments when underwriting loans, says Cunningham.
“The guidance is more black- and-white and makes it easier for consumers to qualify for a mortgage even if they have student loans,” says Cunningham. “A lot of people have income-based repayment plans so their student loan payment is pretty low. In the past, we had to use 1 to 2 percent of the balance as an estimated payment, so that made a huge difference in the amount they could qualify for.”
Student loans may limit the amount someone can borrow, but they’re not likely to disqualify buyers.
• Self-employed borrowers. Qualifying self-employed borrowers is as much art as science, says Stanger, since their loans require more than a fill-in-the-blank application.
“You need to understand their financial capabilities and review at least two years of their personal and business tax returns,” he says. “In some cases, we need to look at a year- to-date profit-and-loss statement and their business balance sheet.”
The rise in self-employment means more lenders are accustomed to these applications and flexible with their approvals. Sometimes borrowers who have been in business for a while can be qualified for a conventional loan based on just one year of taxes, says Cunningham.
“Outside of conventional financing, such as for people whose tax returns have legal write-offs that don’t show enough income for a mortgage, lenders can use bank statements to review their cash f low and consistent income,” he says.
Borrowers who work several jobs or generate income with a side gig, such as driving for a ride-sharing service or working in a restaurant or shop, will need at least two years of that type of income to use it for a loan approval.
“You’ll need to report the income on your tax return, so it can be documented,” says Cunningham.
ARM COMEBACK
Higher mortgage rates are on the minds of most borrowers and some are exploring the option of an adjustable rate mortgage (ARM) – particularly if they plan to move within five years or less, says Kempf.
“We have portfolio loans including ARMs that go up to $2 million with a 10 percent down payment,” says Kempf. “A borrower can take out a 7/1 ARM at a rate of 4.125 percent right now, compared to 5 percent for a 30-year fixed-rate loan if they have a credit score above 720 and a debt-to-income ratio of 43 percent or less.”
Kempf says 7/1 ARMs are the most popular now because they’re fixed for seven years. “Borrowers can use the cash they’re saving with the lower payment to pay down the principal,” he says. “Some clients with enough money for a cash purchase are choosing a 5/1 ARM with a 20 percent down payment at 3.75 percent. That way they can keep their cash for longer and pay it off entirely in five years rather than take money out of their investments now.”
When qualifying for an ARM, lenders will review the worst-case scenario with borrowers, says Stanger.
“People need to see what the potential payment is to make sure they’re comfortable with it in case they don’t sell before the loan resets,” says Stanger. “ARMs are automatically recast when the rates adjust, so people who are paying more on the principal during the initial phase will see less of a payment shock even if the rate is higher because the new payments will be based on a lower balance.”
BRIDGE LOANS FOR MOVE-UP BUYERS
While first-time buyers are challenged by down payment funds, move-up buyers sometimes face a similar conundrum.
“Bridge financing is available for people who can’t sell their home before buying their next,” says Stanger. “In some cases, their down payment funds are tied up in the home equity of their current home and sometimes these borrowers just don’t qualify to carry the loans on two homes at once.”
Lenders can be flexible with bridge loan requirements since they’re portfolio loans and designed to be short-term mortgages, often as short as one year.
“Usually they’re cross-collateralized by liens on both houses,” says Stanger. “The payments are interest-only so they are as low as possible. At the same time, the short term gives borrowers a big incentive to get their home sold and lenders will need to feel comfortable about their ability to sell it.”
CONSTRUCTION AND RENOVATION FINANCING
If your buyers want to build a custom home, tear down a property and rebuild, or buy a fixer-upper and renovate it before they move in, there are plenty of options for financing. In fact, awareness of the availability of FHA 203k loans and Fannie Mae’s HomeStyle renovation loans can help you sell properties that are in less- than-perfect condition or have an outdated style that doesn’t match your buyers’ preferences.
“We offer construction loans with one closing or two closings depending on the circumstances,” says Kempf. “For instance, some homeowners in Arlington own a $900,000 house with a mortgage balance of $300,000. They want to tear it down and build a $2 million house. We can use our construction loan to pay off their mortgage and build their next house with no cash required if they’ve owned the house for at least a year. In that case, we can finance this based on the future appraised value estimated from their plans.”
While your clients should always consult a lender before jumping into the housing market, it’s smart practice to stay abreast of loan programs and guidelines that could help prospective buyers think creatively about their next move. Grow your referral network and stay informed so that you are the trusted resource throughout the real estate transaction.