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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2018

Grow Your Purchase Business

Take the sting out of rising rates with two loan programs

r_2018-04_blend_spot.jpgIt seems like we have been hearing about rising interest rates and the importance of moving away from refinances toward more purchase business for years now. Well, the time is finally upon us, which means mortgage originators must begin to look at opportunities that help them work with referral partners — primarily builders and Realtors — along with products that will help differentiate them from their competitors.

Making these changes can be somewhat challenging for originators who only typically offer vanilla conventional, Federal Housing Administration (FHA) or Veterans Affairs (VA) loans. Originators who are going to thrive in this environment are the ones that think outside the box and whose minds are open to more creative products.

This change also will require a greater understanding of how to sell these other loan “flavors” to referral partners by helping them understand the benefits to themselves and their buyers. Let’s take a look at a couple of loan programs that can help originators increase their competitive edge.

The 2/1 buydown

The first program is a new product to the market place — the 2/1 buydown. This program can be hard to find, but is in great demand by homebuilders. The 2/1 buydown can be used on both FHA and VA loans, and is available for purchasing existing homes as well as new homes.

The 2/1 buydown program helps with the “sticker shock” of rising interest rates. Let’s face it, borrowers have become spoiled when it comes to interest rates. They don’t remember the days of 17.5 percent interest for a 30-year fixed mortgage — or even when those rates eventually dropped back below 10 percent. Today’s homebuyers are used to rates in the 3 percent and low 4 percent range. As rates inch back up toward 5 percent, the 2/1 buydown allows borrowers to get a fixed-rate loan with a starting rate back down in the 3 percent (or lower) range.

Here is how it works: Assume an originator can secure a loan for a borrower at 4.99 percent on a 30-year fixed rate. The borrower can buy down the interest rate to 2.99 percent for the first year, or 2 percent below the original rate. In the second year, the interest rate rises to 3.99 percent, or 1 percent below the original rate. Every year after those first two, the rate remains fixed at the original 4.99 percent.

This program lowers borrowers’ payments significantly over the first two years, giving them additional cash flow to buy appliances, put in a fence or add window coverings, new furniture, etc. With lower payments for two years, the acquisition of such essential lifestyle additions doesn’t pose a hardship, which produces happier borrowers and less risk of default.

Remember, many borrowers — especially first-time homebuyers — are somewhat maxed out on their debt-to-income ratio (DTI) when they secure a home loan. When those homeowners go out and charge up their credit cards to buy new home additions, that already high DTI can escalate into a scary range. With the 2/1 program, this doesn’t occur because you reduce the initial mortgage payment dramatically.

The advantages to homebuilders are substantial. First of all, foreclosures in their developments are not good for business and certainly not good for property values and appraisals. Second, it gives builders an additional tool for their marketing. They can advertise a first-year rate that is extremely appealing. Third, the cost to the homebuilder runs around 2 points for the buydown. Many homebuilders are prepared to pay 3 points to 6 points in the form of closing costs so they, in essence, have already factored in an amount to cover this expense,

As you can see, a product like the 2/1 buydown can give originators an exceptional opportunity to get an appointment with a homebuilder or Realtor. Once in the door, show these potential referral partners how a partnership can increase their business. Isn’t that what being a partner is all about?

Lock and shop

Another product that is becoming more important is the lock-and-shop program. Why? Borrowers follow the news, and are certainly aware that interest rates are increasing. They also understand how challenging it is to find a home today. It has become such a major seller’s market today that home searches often take much longer than expected.

The concern of many borrowers…is that interest rates can rise to the point where they no longer qualify for a mortgage. 

The concern of many borrowers — and their Realtors — is that interest rates can rise to the point where they no longer qualify for a mortgage or can’t afford a home in their price range. Most borrowers don’t start out being overly qualified and many originators are already pushing qualifications to the max to get their clients to qualify. Thus, any increase in a homebuyer’s debt load or mortgage payment could prevent that borrower from qualifying.

Realtors have the same concerns about interest rates, and know that their borrowers are concerned as well. In fact, many Realtors use that information to get borrowers off the fence when they are having difficulty committing to a contract. This provides an opportunity to originators who can offer rate locks.

How does it work? The borrower gets locked into an interest rate for a specified period of time. The property is identified as a TBD, or to be determined, on the documents and the rate lock goes out for 60, 90 or 120 days.

The lock-and-shop program gives Realtors and borrowers plenty of time to find a home, negotiate a price, get inspections and appraisals and close the loan without worrying about rising interest rates during that time. Plus, originators can still deliver the loan to investors within the lock period.

This is an exceptional tool to get one’s foot into most any Realtor’s door. They will completely understand the advantages of having this lending tool available for their clients.

•  •  •

These two innovative products — the 2/1 buydown and the lock and shop — are available to most originators. They can even be combined because what benefits builders also benefits Realtors and vice-versa. It is no longer satisfactory to just be an order taker. It is time for business plans to shift gears and for originators who want to continue their successful and lucrative careers to do what it takes to become a vital cog for both builders and Realtors in a rising interest rate environment.


 
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