What do great teachers and successful mortgage originators have in common? Besides patience and stamina, they always remember that no two people are exactly the same.
In the classroom, there are visual and auditory learners, and more combinations of personality traits than keys on a piano. The secret to engaging each student and getting them sold on learning is to recognize these differences.
Loan officers and mortgage brokers who achieve “high honors” in the industry are applying the same principles — or should be — in order to capture more purchase loan business. They align their offerings with homebuyers’ trending needs and preferences, then match these mortgage products to each individual borrower. But that’s often easier said than done in a business environment that favors more conventional lending practices.
Homebuyers are changing, but the mortgage products being offered and the criteria for underwriting them are largely staying the same. Consider the experience of qualifying for a mortgage. Even the word “qualifying” is a misnomer. For example, the traditional criterion of a regular paycheck, demonstrated by a W-2 wage and tax statement, leaves out a wide range of borrowers — including business owners, high net worth consumers and real estate investors. It’s estimated that one in 10 U.S. workers fall into the category of self-employed and are likely to be shut out of the qualified mortgage market for this reason.
Yet there are untapped opportunities to bring these people in through private financing, such as nonqualified (non-QM) and nonagency mortgages. By supporting these nontraditional homebuyers with the right products and services, the industry could benefit from an estimated $25 billion market opportunity.
New American dream
What’s changed among today’s homebuyers and who are the people who need financing outside the boundaries of traditional government-backed mortgages? Many have a new American dream beyond homeownership. They also want to succeed as entrepreneurs.
The numbers bear this out: As of August 2021, there were about 10.3 million self-employed workers, according to the U.S. Bureau of Labor Statistics. In addition, at the height of the COVID-19 pandemic, the nation saw a flood of new businesses. A September 2020 article in The Wall Street Journal noted that applications for identification numbers to form a business had climbed to more than 3.2 million during the first three quarters of the year, up from 2.7 million during the same period in 2019.
Many of these new business leaders will likely become excellent mortgage prospects as they grow their companies. But they won’t have the regular income (documented by a W-2 form) that underwriters of traditional mortgages require.
Another potential market is represented by people who understand mortgages to be a wealth-management tool within a portfolio of residential properties, mutual funds and a range of other investments. For them, homebuying is part of a broad financial strategy and so is taking out a mortgage — which gives them the liquidity they need to continue rebalancing their portfolio. Even if they are affluent, they also can have a difficult time qualifying for a traditional mortgage.
They represent another opportunity waiting in the wings. In 2020, 1.8 million households owned between $5 million and $25 million in assets, not including their primary residences. Many of these individuals or couples are actively seeking mortgage debt so they can manage their wealth with agility.
Investors in need
Additionally, there are fix-and-flip real estate investors who earn a living by purchasing, rehabilitating and reselling homes. According to Attom Data Solutions, gross profits for U.S. home flips reached a 15-year high of $66,000 in 2020.
This figure dipped to $63,500 in first-quarter 2021 as rising purchase prices caused the average return on investment (measured by dividing the gross profit by the investor’s initial purchase price) to drop to its lowest level since shortly after the Great Recession. Still, home flipping remains a viable activity in many areas of the country.
Rental properties also are becoming more attractive as long-term investments. More prospective first-time homebuyers, for example, are choosing (or are essentially being forced) to wait out the increasingly pricey market for now. Families with young children may be delaying their purchase of the perfect maintenance-free home, and are satisfied to dole out sizable rent checks in exchange for more space and flexibility.
Will individuals with a good track record as property investors gain the confidence of a mortgage provider? These individuals, too, may have a comfortable lifestyle without the standard documentation to prove they’re a good credit risk. With their cash bound up in real estate investments, they also will need an alternative financing strategy to buy a primary residence.
Mining for gold
There are other types of promising prospects who may require a nontraditional route to homeownership. Affluent members of the baby-boomer generation are at the top of this list. Although boomers have been surpassed in size by the millennial generation, they still account for a substantially large consumer market — and an increasing share will live actively into their 90s.
If they are seeking a second home, or require a jumbo or super jumbo mortgage, they won’t want to liquidate their investments. They’ll need alternatives to finance this plan. Indeed, the dramatic appreciation of home values will fuel even more demand for mortgages that exceed state-based agency loan caps.
Look to market to property investors who are seeking multiunit homes. In many cases, the rent they charge will become the income for qualifying their loans. And you can look to help a subset of self-employed individuals (again, lacking W-2 forms) who are moving to another state and need to quickly buy a home.
Lastly, there are otherwise responsible people who have dealt with a previous foreclosure and therefore cannot obtain a conventional loan. This will likely become more commonplace now that the federal foreclosure moratorium tied to the pandemic has ended.
By addressing these and other underserved borrowers, mortgage originators are well-positioned to find new revenue streams and grow business in their local markets. The key for loan officers and brokers is to throw out the standard playbook and really get to know the borrowers they’re serving.
Progressive new methods of evaluating a borrower’s creditworthiness — such as examining one to two years of personal and business bank statements, or determining qualifying income based on stocks, bonds, mutual funds and other assets — are important for identifying the people who can easily handle mortgage debt and have previously been pushed to the sidelines. These clients also tend to be the ones who are best suited for products with higher loan-to-value ratios or debt-service-coverage ratios, based on their wealth and their financial history.
A whole new industry could take shape — one that puts clients first while still growing top-line revenue through non-QM and nonagency mortgages. Maybe one day these borrower classifications will go away entirely as lenders take bold steps toward a more profitable future, one borrower and one loan at a time. ●