Residential Magazine

New Financing Models Could Free Up Inventory

Innovative companies are generating products to remove housing market barriers

By Dan Mugge

About one in three existing homeowners say they want to move but are staying in their current home because of the risks, hassles and stresses that come with homebuying, according to a number of surveys. The housing market would greatly benefit if these homeowners would leave the sidelines, put their houses up for sale and shop for new homes.

High interest rates are creating the so-called “locked-in effect,” a disincentive for homeowners to sell because they worry that their current mortgage rate is far below the current market rates. Housing inventory remains tight, keeping home prices stubbornly high.

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New tools are necessary for mortgage originators and their referral partners looking for strategies to attract hesitant homebuyers back to the mortgage market in a complex and high interest rate environment. Innovative companies are creating financing products that could allow these buyers to put their home on the market worry-free and ease inventory shortages.

Consumer struggles

Beyond high mortgage rates and high home prices, retail consumers face stiff competition. Investors such as BlackRock and Jeff Bezos’ new real estate project Arrived have access to deep pockets to make the sort of all-cash bids that can strain and stress retail buyers.

While major players can make all-cash offers, many homeowners can’t. With home equity trapped in their clients’ existing homes before they sell, lenders often are unable to help pre-sale, forcing homebuyers into undesirable scenarios and bidding strategies.

To solve this problem, industry experts have tried their best to close the gap with mixed results. Contingent financing — offers that allow buyers to walk away without penalty if their existing home doesn’t sell — jeopardizes bidding and complicates the closing process with difficult timing requirements. By nature, contingent financing is contingent, meaning insecurity and anxiety are encoded into the very process. Contingent buyers also have to bid about 10% higher than a competing cash offer for a seller to choose their offer, according to one survey.

Similarly, while bridge loans can help some homeowners buy and move before they sell, the risk involved can cause more problems than they solve. Homeowners who use bridge loans must carry three loans at once — the original mortgage, the new mortgage and the bridge loan — until the first home sells.

Simplified process

New financing products enable homeowners to tap the equity in their existing home in different ways to buy and move into their new home before they sell. This simplifies the entire homebuying process by allowing homeowners to use the equity to make a more significant downpayment.

Homeowners can also submit non-contingent offers that are more likely to be accepted than contingent offers, buy and move before they sell their current home and work with their preferred agent to stage and show their original home after they have moved out.

One way that this works is homeowners obtain a guaranteed backup offer on their existing home, which ensures the home will sell for an agreed-upon price if it isn’t purchased at a higher price on the open market. Homeowners pay a fee for the confidence and certainty in this unpredictable market. Having the backup offer in place enables community lenders to write the mortgage on the next home as if the current home has already sold.

Their real estate agent has a set amount of time to sell the old home. Mortgage originators can provide non-contingent financing and eliminate the existing home from debt-to-income considerations when qualifying homeowners for their new loan; this usually increases how much the borrower can be eligible for on their next home.

Finally, homeowners can list and sell their current home for full value while knowing they have a backup offer if it does not sell. This gives them time and the opportunity to capture the full market value for their house without carrying two mortgages indefinitely.

Reduced stress

This financing concept is more streamlined and cost-effective than iBuyers or power buyers’ existing “cash offer” and “buy before you sell” products. With iBuyers, the original home is purchased for below-market rates, so the consumer can transfer their equity into cash quickly. With power buyers, the company purchases the borrower’s next home for them and leases it back until the original one sells.

These methods, however, mean that homeowners are paying duplicate closing costs and, in some instances, indefinite leaseback fees until the original home sells. In comparison, homebuyers who have a guaranteed offer can retain wealth by seamlessly transferring their equity from one property to another and avoid duplicate closing costs.

This financing concept enables homeowners to capture the full financial value of their current home. This product also makes it possible for originators and real estate agents to identify homeowners in their client databases who could use their equity as cash to buy a new home with less friction and at a lower cost than ever before.

With this type of financing, homeowners can use the equity in their current homes to make a downpayment on a new home and buy before they sell, thus reducing the cost and stress of moving. With this tool, buyers can finally use their equity to reach their homeownership goals. The question is which agents and originators will use it? ●


  • Dan Mugge

    Dan Mugge is chief operating officer for Calque, a leader in empowering established lenders to offer innovative mortgage solutions, including its flagship product, The Trade-In Mortgage. Mugge is an expert in business technology with 25 years of experience in strategy and development within the mortgage and real estate service industries. He has held various senior technology and business management roles at leading companies including First American, CoreLogic and Black Knight.

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