From Courtship to Consummation: Navigating the Lender Relationship 

Realtors® typically suggest that their clients work with a local lender, and recommend several vetted and endorsed by their broker. But buyers don’t always listen to their agents. One recent buyer applied for a loan to purchase a condo in Alexandria and insisted on using an online lender that offered the lowest interest rate.

“One week before the closing, the buyer discovered that the lender didn’t know he was buying a condo, even though that was clearly stated in the contract and loan application,” says Glenn Lewis, branch vice president of Coldwell Banker Residential Brokerage in Alexandria. “Fortunately, we were able to find a local lender who could quickly approve a new loan and get the closing done.”

Financing issues frustrate buyers, sellers, Realtors® and lenders, all of whom have a stake in getting a transaction to completion. Yet real estate professionals are beginning to see anecdotal evidence that mortgage approvals are becoming slightly easier to obtain. In addition, new low down payment loan programs are easing the cash needs for buyers, which particularly helps first-time buyers and even first move-up buyers. 
However, the level of documentation required to prove that the borrowers are creditworthy has not lightened. 

“Loans are more about the papers than the people,” says Steve Farbstein, group senior vice president and head of mortgage banking at Park Sterling Bank in Richmond. “Compliance-related issues have made the process harder on borrowers and lenders. Lenders want to make loans, but they also need to follow the regulations in order to make those loans.”

Farbstein says Realtors® should set expectations for borrowers about the loan process and help them understand that lenders and borrowers can be effective partners. 
While Realtors® cannot be involved in the details of individual loans, they should stay informed about changes in the mortgage landscape that can impact borrowers.

PARTNERING WITH GOOD LENDERS
Farbstein says everyone hears stories about good or bad service from lenders, but he says it’s important to find out whether the issue was the loan or the lender.
“If someone had a problem such as bad credit or an appraisal issue and the loan didn’t go through, that’s a lot different than if a lender had a problem delivering what should be an easier loan,” says Farbstein. 

“While Realtors® cannot be involved in the details of individual loans, they should stay informed about changes in the mortgage landscape that can impact borrowers.”

Lewis suggests that each agent should have a list of three or four lenders who have a good reputation in the community, because a purchase offer with a preapproved loan from a well-known local lender can help a contract rise to the top when there are multiple offers. 

“Smart relationships are more important than ever,” says Kevin Quaid, sales manager at George Mason Mortgage in Fairfax. “Realtors® need to partner their buyers with a lender they trust and then follow up with the lender and buyers throughout the transaction, especially a week or so before the closing.”

PREPARING YOUR BUYERS FOR A WHIRLWIND 'ROMANCE'
When you’re working with buyers, your role as a Realtor® is to prepare them for what may be an uncomfortable moment: standing financially naked in front of a lender.

“Realtors® need to educate buyers that they are about to start what I call a ‘30-day romance’ with a lender,” says Lewis. “Buyers need to realize they’re asking for a lot of money, so they need to be ready to stay in constant communication with the lender and to give them any information the lender wants. Sometimes it helps to explain that once the closing is done and the buyers get their money, the romance is over and they can go back to a normal life.” 

NEW GUIDELINES
When the Consumer Financial Protection Bureau (CFPB) Qualified Mortgage (QM) rules went into effect in early January 2014, real estate professionals were concerned that the rules could reduce the ability of some borrowers to get a loan. However, the impact of QM seems to have been minimal. 

“QM wasn’t a game changer, just a change,” says Quaid. “The biggest outcome is that lenders don’t have the ability to offer some special loan programs such as interest-only loans. Those loans were a good product for a few borrowers with extremely unusual circumstances.” 

A positive outcome of QM is that community banks are beginning to offer more portfolio loans to borrowers who have financial circumstances that don’t fit into the typical parameters of conventional loans. 
“The fear was that other types of loans wouldn’t be available because QM established one standard set of requirements that lenders had to meet in order to get protection from lawsuits,” says Richard Owen, senior vice president and residential mortgage manager at Middleburg Bank in Richmond. “But we’ve found community banks are willing to do non-QM loans.” 

More recently, Quaid says, Fannie Mae loosened some guidelines for lenders.
“One of the most significant changes is that buyers who plan to keep their current home for rental income used to need at least 30 percent in home equity and additional cash reserves, but now they just need a lease on the home to show the lender,” says Quaid. 
Another change is that borrowers can get 100 percent credit for the value of their stocks, bonds and mutual funds (up from 70 percent credit) toward required reserve funds. 

DOWN PAYMENT OPTIONS
Borrowers have an easier time accumulating the cash required to buy a home now that more low down payment loan options are available. 
“There’s still a misconception among many buyers that you need a 20 percent down payment to buy a house,” says Lewis. “Realtors® should tell buyers to ask a lender about their eligibility for either a VA loan with zero down payment, FHA financing with 3.5 percent down, or the new conventional loans with as low as 3 percent down.”

FHA loans are more attractive to buyers now that the annual mortgage insurance costs have been lowered from 1.35 percent to 0.85 percent. Conventional loans are available from both Fannie Mae and Freddie Mac with a down payment of 3 percent, with private mortgage insurance costs depending on the borrowers’ credit profile. 

“Low-down-payment loans of 3.5 percent or less accounted for almost one-third of all loans in the last quarter, which is a higher percentage than in the past few years,” says Howell, citing Keeping Current Matters for the data. “The average credit score for buyers using low-down-payment loans was 688, which shows that the credit guidelines are getting a little looser.”

Down payment assistance programs are available through the Virginia Housing Development Authority, from some local governments, through some employers and directly from some lenders.
“You can search on the Federal Home Loan Bank of Atlanta site to find member banks, and ask if they offer down payment assistance grants to first-time buyers,” says Owen.
Buyers can also look for down payment and closing cost assistance by location at www.DownPaymentResource.com. 

IMPERFECT BUYERS MAY STILL FIND A MATCH
Borrowers with limited cash or a lower credit score are not automatically barred from becoming homeowners, but it may be more challenging for them to find a loan. 

"Now, more than ever, it's not about selling products,” says Owen. “It's about educating homebuyers, guiding them through the process by managing expectations, and helping them make the best choices."

“Every bank has a different mindset; some are more conservative than others,” says Farbstein.

Loan programs are available for higher risk borrowers. For example, if a buyer has a low credit score, a larger down payment may be required to qualify for a loan. Every loan approval depends on a combination of factors, including the borrowers’ debt-to-income ratio, credit score and their loan-to-value ratio. 

“We need to find a marriage between a borrower and a loan,” says Farbstein. 
The FHA “Back to Work” program, available until Sept. 30 2016, makes it easier for buyers who experienced a foreclosure or bankruptcy to qualify for a loan within one year of the event, as long as they can prove their financial hardship was a result of the recession rather than a lack of fiscal responsibility. 

IMPACT OF HIGHER MORTGAGE RATES
The potential for higher mortgage rates can cause anxiety for buyers. Farbstein says Realtors® should put this in perspective since rates will still be extremely attractive, on a historical basis, for at least the next year. David Howell of McEnearney Associates in McLean points out, people still bought and sold homes when mortgage rates were 17 percent. However, Howell acknowledges there could be some short-term impact on the housing market if rates rise. 

“A jump in interest rate from 4 percent to 5 percent equals a loss of purchasing power of about 11 to 12 percent,” says Howell. “That will probably knock a few people out of the market and will slow the upward pressure on prices. But generally, if rates are up because the economy is improving then that will help the housing market. When people get better jobs and better income, they often buy houses.”
Shifting interest rates and guidelines make the role of the Realtor® even more important to buyers, regardless of whether they are first-timers or repeat buyers. 

"Now, more than ever, it's not about selling products,” says Owen. “It's about educating homebuyers, guiding them through the process by managing expectations, and helping them make the best choices."

NEW CFPB RULES AND HOME FINANCING
On Oct. 3, lenders and title companies must begin complying with the new “TILA-RESPA Integrated Disclosure” (TRID) rules and forms developed by the Consumer Financial Protection Bureau. The new forms and rules are designed to be consumer-friendly, with more plain language terms, making it easier for borrowers to shop for a loan. 

“Once the new rules are implemented there will probably be a few bumps in the road, but that will work itself out with time,” says Howell. “Realtors® need to realize that the closing documents will be prepped by the lender instead of the title company. The lenders, title companies and Realtors® need to have a tighter relationship. That’s why it’s more important than ever to work with a local lender.”

Owen says that the complexity of the TRID transition and necessity for lenders to spend time and money on software and staff to comply with the new rules could eventually translate into extra costs for consumers in the form of higher lender fees. 

DOs AND DON'Ts TO SHARE WITH BUYERS
DOs
• Work with a local lender so you have someone who understands your market and who will be there if glitches arise during the transaction.
• Shop around for a loan, but be careful to compare apples-to-apples when looking at rates. Shop based on customer service, not just rates. 
• Understand that the lowest interest rate isn’t always the best loan. 
• Get fully preapproved for a loan in order to compete with cash buyers.
• After you qualify for a loan, decide how much you want to actually spend on your housing payment in the context of your other financial obligations and plans. 
• Be aware the some lenders only provide specific types of loans, and each has a different risk appetite. If you’re turned down for a loan by one lender you may still qualify with another. 
DON'Ts
• Don’t make it harder on your lender. When you’re asked for something, provide it as soon as possible.
• Ask your lender about all deadlines so you can keep up with requirements in a timely way. 
• Don’t make any changes to your financial profile – such as taking on new debt or applying for new credit – between the time your loan is approved and the closing.