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Dear James,
I'm sure we're all getting the question from clients lately: "How can I beat rising interest rates?" And while we all know that you can't 'beat the system', there are definitely strategies we can use to mitigate these increases. Since this is a common theme lately, I thought I'd write a piece written directly to clients so you can pass along as needed.
While the overall interest rate market is rising, there are many steps buyers can take to lower their own personal mortgage rate. While the overall interest rate market is rising, there are many steps buyers can take to lower mortgage rates.
First off, let's introduce a new loan program that may help many people looking to purchase a home now:
The New '2-1 Buydown Inflation Protection' Program
With this new offering, you can lower your payment while markets calm down and things return to normal. The program you can get either one or two year rate reduction options. Of course, your circumstances must be taken into consideration, so we should discuss this with your agent first to see if this new program would be useful to you.
Buy down your rate with points
You can lower your mortgage interest rate by paying for discount points upfront. Each discount point costs 1% of your loan amount. So if you are seeking to borrow $300,000, one discount point would cost you $3,000 and would typically lower your rate by 25 basis points (0.25%).
The general rule is that you can buy your rate down 0.25% for every discount point you purchase. However, lenders set their own pricing, so the savings may be more or less, depending on your mortgage company.
To determine if purchasing points makes sense for you, divide your buydown cost by the monthly savings to calculate your breakeven point.
For instance, if paying $3,000 for one discount point saves you $100 per month on your mortgage payment, your breakeven point would be approximately 30 months — or two and a half years. You would have to remain in the home for at least that long to recoup your buydown cost.
Consider an adjustable-rate mortgage
When fixed mortgage rates spike, some borrowers turn to adjustable-rate mortgages (ARMs). Many lenders offer ARM loans with initial teaser rates fixed for a set period — typically the first three, five, seven, or 10 years of a 30-year loan. These teaser rates generally are lower than the interest rate charged for a fixed-rate mortgage loan.
The downside is that after your ARM’s initial fixed-rate period concludes, your rate can adjust based on a margin and index outlined in your loan’s paperwork. That can lead to a higher rate and monthly payment down the line.
That said, ARMs make sense if you plan to live in a home for a short period or want a lower monthly payment ahead of an expected salary raise or bonus. There are yearly and lifetime caps limiting how much the payment can go up over time. Before committing to an ARM, look closely for any prepayment penalties to avoid getting stuck in an ARM that doesn’t allow you to refinance without paying a fee.
Use a shorter-term loan
Many lenders offer mortgage loans with shorter terms, such as 15 or 20 years. A 15-year loan often comes with an interest rate that is 0.5% to 0.75% lower than comparable 30-year rates.
Another benefit of selecting a shorter-term loan is that you will pay much less interest over the life of that loan and build equity in your home faster. So you’ll save big on interest charges compared to a 30-year term.
Keep in mind, though, that 15-year loan payments are significantly higher. That’s because you’re paying off the same loan amount in half the time. So run the numbers carefully and be sure you can comfortably afford the payments before committing to this type of loan.
Make a larger down payment
“A larger down payment means you are a less risky borrower, which could mean a lower interest rate,” says Jennifer Chiongian, a real estate broker in New York City. In addition, a larger down payment will result in a lower monthly payment over the life of your loan.
Plus, by making at least a 20% down payment, you can sidestep paying for private mortgage insurance (PMI) on a conventional loan.
Qualify for a different loan product
You may be able to get a lower interest rate — and make little to no down payment — by qualifying for the right loan type. Conforming, FHA, VA, and USDA loans can all offer great deals, but you need to find the loan product that best matches your profile.
For instance, FHA loans are usually cheaper if you have fair or poor credit while conforming loan rates are lower with great credit. A VA loan is only available to qualified active-duty military members, veterans, or surviving spouses. And USDA loans are only applicable for properties in designated rural areas.
Improve your credit
Often, the best way to secure the lowest mortgage rate is to ensure that you qualify for it. This can be accomplished by checking your three free credit reports and making sure no errors exist, and by paying down credit cards or other debt. Team Noble is always happy to assist anytime with credit issues/errors that come up.
Should you be worried about rising rates as a homebuyer?
Higher mortgage rates can lead to higher monthly payments and more total interest paid over the life of your loan. However, that doesn’t mean it’s time to panic or rush prematurely into any choice. The best time to buy a home is when it’s best for your family. While we are seeing an increase in mortgage rates, potential home purchasers should look at their financial situation to see if it makes sense for them to purchase a property sooner than later. The interest rate shouldn’t be your only determining factor.
That's because BUYING THE DIP makes the best sense. Inventory is up & home prices are down. Buying a home at a lower price means immediate savings. And while rates are higher, as soon as they drop, you can refinance and save even more money. Basically you'll save on the home price now, and save more on lower rates later. Of course, every client's situation/goals are different, so as always, it's best for us to sit down together and devise a game plan based upon your unique circumstances. Call your agent and let's all get together to see what alternatives are available to you.
If you're currently working with a Noble Loan Officer, contact them today for more information on any of our programs. Otherwise, I am always available to discuss loan programs, co-branding, and other ways to add value to your business anytime.
Dear James,
For the past few years, everyone has been speculating about rates going up. Well, surprise, surprise — rates have increased. While we can’t be certain if they will get even higher or come down, we can count on rates continuing to change.
Most industry professionals have never seen rates move as quickly as they have been lately, so let’s take a moment to dive into rates and how you can help your clients navigate this higher-rate environment.
Rate Trends Historically
Like I said, if we know anything about rates, it’s that they will fluctuate. Every decade — and even every year — they will have their highs and lows. It’s encouraging to remember that these are not the highest rates have ever been — not even close. Rates have been so low in the last few decades that it makes today’s rates seem more intimidating than it should. It is the highest they’ve been in years, but if you look over decades of rates, today’s “high” rates are still well below average, data from Freddie Mac shows. Rates have been as high as 19% looking back to the early 80s and the average for a 30-year-fixed-rate over the last 30 years is 7.78%. When examined a bit closer, rates aren’t as bad as they seem.
Navigating High Rates
Though rates are still historically low, they are the highest they’ve been in quite a while. Many of us may be unsure about how you can help clients in this environment. High rates create uncertainty for you, so just imagine how your clients feel. Between increased rates and low inventory, anyone on the hunt for a home could get frazzled.
We need to start with easing their concerns. There can be so much stress associated with buying a home right now, so help we need to help clients understand the process. The more they know about getting a mortgage, the less they will fear it. Also, help them understand why rates have headed north. The average client does not have a great understanding of how the market works. Again, the more they know, the less they have to fear.
Finally, we need to be sure to communicate any options they have for dealing with increasing rates. I'm always happy to sit with you and your client to go over solutions as there are many programs out there for all types of clients that can help them manage affordability and offset the cost of higher rates.
ARMS
For example, adjustable-rate mortgages are a potential solution for a lot of borrowers looking to deal with today’s higher rates. However, ARMs have been out of the conversation for the better part of a decade. According to CoreLogic data, ARM share of the dollar volume of mortgage originations moved from near 45% in 2005 to 2% in 2009. Since then, the ARM share has varied from as high as 18% to as low as 8%. ARM usage declined during the pandemic and reached a 10-year low of 4% in January 2021. At the end of April, the Mortgage Bankers Association reported that the share of ARMs as a percentage of home loans had doubled over the last 3 months.
Since not many people use them or understand them, ARMs have gotten a bad reputation. It’s easy for anyone to hear the word adjustable and just assume the rate will change unpredictably and without warning, so let’s talk about how ARMs work so we can remove that stigma and help more clients.
How ARMs work: With a hybrid ARM, during the initial number of years, which is determined upfront, the interest rate will stay the same. The initial interest rate will change based on an index that reflects general economic trends but is set for that initial period when the loan closes. There is also a margin, which is an extra percentage the lender adds along with the index. After the initial period, the interest rate may change each adjustment period; the adjustment frequency and index are disclosed at application along with the maximum cap.
Lenders will generally charge lower initial interest rates for ARMs than for fixed-rate mortgages of the same amount, which makes ARMs an option for those who don’t plan to stay in their house very long. ARMs also can be an option for anyone expecting their income to grow over that initial period of time.
An ARM could potentially be less expensive over a long period than a fixed-rate mortgage — for example, if interest rates remain steady or move lower.
Empower Clients
Don’t be discouraged by today’s market and don’t let your clients become discouraged either. Rather, let's empower them with the right tools, products and knowledge that can guide them to their new home.
In times like these, I always try to bring all aspects of home buying together, laying out both the pros and the cons. As illustrated above, the more knowledge we can pass along to clients, the more empowered they will become. Every client and every situation is different, so I think it's always best for us to sit down and assess what we can do for them and the best way to get it done. I am always here as you need, so please call anytime you have questions. We can run scenarios and find the best solution. Call me anytime!
If you're currently working with a Noble Loan Officer, contact them today for more information on any of our programs. Otherwise, I am always available to discuss loan programs, co-branding, and other ways to add value
to your business anytime.
Dear James,
I think we all can agree that a serious lack of homes for sale over the last 18 months has made house hunting in 2022 quite a challenge. It can feel like whenever your client finds a listing that meets their needs, their offer gets buried under a pile of competitive bids.
However, inventory normally recovers by the end of summer. And 2022’s significant mortgage rate growth could help bring back this typical seasonality. By late summer and early fall, there should be a bump in listings for buyers to look forward to.
Are more homes coming to the market in 2022?
In a normal year, available homes for sale become most plentiful sometime between July and September. While recent history has been anything but normal, 2022 could start heading in that direction.
About 64% of prospective home sellers plan to list their properties by the end of August, according to a Realtor.com report . In even better news, a 43% share of those selling have expected prices below $350,000 — the range most first-time buyers target — and 22% anticipate listing between $350,000 and $500,000.
The interest rate factor
Mortgage rates soared to start 2022, dropping buyer affordability in the process. And it’s not like the market was full of bargains before that — as home prices grew at double-digit percentages annually for each of the past 12 months, including by 20% in February, according to CoreLogic.
The meteoric rise in mortgage rates works both for and against increasing inventory. Some otherwise would-be sellers could decide to stay put if they find the new interest rates to be unfavorable. Although, the higher costs to buy should lower demand and reduce the market competition.
Will housing inventory ever rebound?
Low inventory keeps the housing market from equilibrium and has given sellers the upper hand in the past few years. However, a silver lining for buyers may sit on the horizon.
For-sale housing supply averaged 1.6 million units per month in 2018 and 2019 but fell to around 1 million in 2021, according to Zillow. Based on a March survey conducted by the company, a 74% share of industry experts believe the market will get back to those pre-pandemic inventory levels by 2024.
Why isn’t the market recovering faster?
The main culprit behind the inventory shortage is slowed construction across all housing types over time. Today’s supply chain issues and municipal zoning laws delay new properties from being completed and restrict opening up more properties.
Though construction numbers are also pointing upward. In its March forecast, the Mortgage Bankers Association estimated 1.71 million housing starts for 2022 and 1.79 million for 2023, compared to 2021’s 1.6 million.
Advice for home buyers in 2022
Trying to buy a house right now is tough with the growth in prices and mortgage rates, as well as the lack of homes for sale. Of course, there are many success stories out there and programs to take advantage of to help strengthen your client's buying position. There are reasons to be positive as the housing market evolves.
Bottom line: clients should be as prepared as possible so when the right listing comes along, they’re ready. We can help them do that by working together to ensure that any credit issues are resolved, they've got all their paperwork in order, and are keeping debt/big ticket purchases to a minimum (for starters, usually there is more we can do). We could work on a plan with these clients so that when inventory frees up and they find their perfect home, we'll all be ready to hit the ground running and get them into homes faster. Please reach out anytime, I am always here as you need.
If you're currently working with a Noble Loan Officer, contact them today for more information on any of our programs. Otherwise, I am always available to discuss loan programs, co-branding, and other ways to add value to your business anytime.
In these interesting new economic times, you might be surprised to know that self-employed home buyers are very common today. Since self-employment and homeownership are coming up more and more, I thought I'd share another piece written to your clients so you can pass along as need arise.
According to Gallup, nearly a third of all Americans are self-employed in some capacity. That means a large share of U.S. home buyers are using self-employment income to get mortgage-approved.
While this can be a bit more challenging than buying a home with ‘traditional’ income, the extra hurdles are nothing self-employed buyers can’t overcome.
If you know what to expect and have the right paperwork in order, being self-employed shouldn’t get in the way of your plans as a first-time home buyer.
No W2s needed for self-employed borrowers
A mortgage lender’s main job is to verify your ‘ability to repay’ a mortgage loan.
Lenders look at credit, income, employment, and ongoing debts to gauge your ability to make monthly mortgage payments. If the underwriter can verify your cash flow and budget are stable enough to support a mortgage, you can probably get approved to buy a home.
Historically, documenting your income meant providing W2 forms and paystubs. But that posed a problem for self-employed applicants who don’t have such documents.
Luckily, the Dodd-Frank Act of 2010 opened up home buying opportunities for self-employed home buyers.
The Act states that lenders can verify income and assets using “the consumer’s… W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets.”
That means you don’t need ‘standard’ tax forms or paystubs to get approved.
Today, lenders can accept personal tax returns, business tax returns, and even bank statements as proof of your ability to repay the loan.
The trick is figuring out which strategy will make it easiest for you to get approved.
Types of mortgages for self-employed first-time home buyers
There are plenty of borrowing options available today for self-employed home buyers.
You don’t need to use a ‘specialty’ home loan — and in fact, most self-employed buyers end up using one of the common loan types available to everyone.
But, if your needs are a little different, a specialized self-employed mortgage might suit you. Here’s what you should know.
Standard mortgage programs
‘Standard’ mortgage loans available to all home buyers are also available to self-employed borrowers. These include conventional loans (backed by Fannie Mae and Freddie Mac), FHA loans, VA loans, USDA loans, and jumbo loans.
All major loan types require at least two years of self-employment history to qualify.
However, many lenders and loan programs are flexible. You can often get approved with only one year of self-employment history, as long as you worked 2 prior years in a related field and earned a comparable or greater income.
The best mortgage for you will depend on your goals.
For instance, do you have good credit, 20% down, and want to avoid mortgage insurance? Then a conventional mortgage is best.
A government-backed loan (FHA, VA, or USDA) is often better if you need looser eligibility requirements.
FHA loans allow a credit score as low as 580 and are more flexible about credit history. If you qualify for VA or USDA financing, no down payment is required.
Bank statement mortgages
Often, the big challenge for self-employed borrowers is not whether they can get a mortgage but how much they can get approved for.
That’s because mortgage lenders only count taxable income on your mortgage application. And self-employed workers — as you likely know — tend to write off as many of their business expenses as possible.
While large write-offs can save you money at tax time, they might hurt your home buying prospects.
When a lender looks at your tax returns, your income could look smaller than it really is. And that means you might qualify for a smaller loan amount than you can truly afford.
Enter the ‘bank statement loan.’
Bank statement mortgages were created as an alternative solution for self-employed home buyers with large tax write-offs. Instead of qualifying based on your tax returns, these loans allow you to qualify using ‘real’ income shown on your bank statements.
Bank statement lenders typically look at your past 12-24 months’ worth of bank statements to find your average monthly income, which could be greater than the income shown on your tax returns.
However, there’s a downside.
Bank statement loans are considered non-qualified mortgages (Non-QMs). As such, they’re not available from all lenders and often have significantly higher rates than the standard mortgage loans discussed above.
Thanks to their lower interest rates, first-time self-employed buyers often prefer conventional or government-backed mortgages over bank statement loans.
Eligibility requirements for self-employed borrowers
Self-employed borrowers will document their income differently than W2 employees. But aside from that, you have to meet the same requirements to buy a house as anyone else.
Typical eligibility requirements to get a mortgage include:
The upfront cash requirement can be a big obstacle for first-time home buyers.
Although many can get a loan with just 3% down, closing costs add another 2-5% — bringing your total upfront costs to at least 5-8% out of pocket.
Luckily, there are creative ways to cover your down payment and upfront fees if your savings account is a little thin.
Lenders will accept cash down payment gifts or funds from down payment assistance programs. And many offer lender credits, which allow the lender to pay your closing costs. (Though in exchange, you’ll pay a higher interest rate.)
The point is that lenders are flexible, and it’s often easier to get approved for a mortgage than first-time buyers expect.
Challenges for first-time buyers who are self-employed
Today, real estate financing is more widely available than it used to be. But, unfortunately, the COVID pandemic has introduced some new challenges for self-employed applicants.
Coronavirus has been especially difficult for self-employed workers in the gig economy. With employment prospects uncertain, lenders have become more restrictive about offering financing to self-employed borrowers.
If you’re in a field that was strongly impacted by pandemic shutdowns — for instance, events or hospitality — you might find it more difficult to get approved right now.
And if you were recently unemployed, you’ll have to wait until you’re back in a stable job to get financing.
But, if you’ve stayed employed throughout the pandemic, you should still be able to get a mortgage. If you’re qualified, financing options are out there. And as vaccinations continue and the economy recharges, things should become easier.
Of course, every self-employed client and situation is going to be different. Let's work on a case by case basis to put the right client with the right loan. Adding value and keeping our clients informed is at the top of my daily goals list. I'm always here as you need, so reach out anytime. If you have any questions about this latest piece specifically, give me a call! I'm always happy to add value and assist you as needed.
Please stay healthy everyone. Please call me if you have any questions at all. These are unprecedented times are I am always happy to be an additional resource to help navigate through it.
If you're currently working with a Noble Loan Officer, contact them today for more information on any of our programs. Otherwise, I am always available to discuss loan programs, co-branding, and other ways to add value to your business anytime.
Sometimes I get the same question from a lot of different places at right around the same time and that tells me it must be time to tackle the question in a Monday piece and put us all on the same page. This one is again written to our clients, as they seem to be the ones asking how they can buy a home by using a mortgage when so many out there are making cash offers. Please pass along as needed Here's an interesting stat: about one in four home buyers are making all-cash offers in today’s real estate market. These cash bids offer sure-fire money and fast closing — both of which can be tempting for eager sellers. Unfortunately, not everyone can afford to cough up hundreds of thousands in cash upfront. The majority of buyers (especially first-time home buyers) rely on mortgages to finance a home purchase. But if you’re in this boat, there are still ways to compete. Here’s how. Tips to compete with an all-cash offerIt’s no secret that the housing market is on fire. In fact, according to real estate brokerage Redfin, a whopping three-quarters of buyers face a bidding war these days. To stand out from the pack, many buyers ( that 25% mentioned above, actually) are making cash offers. Offering all cash can definitely catch sellers’ eyes, but there are other ways to sweeten the deal if you’re using a mortgage. Here are just a few that can help you beat out the competition: 1. Get approved for your mortgageGetting mortgage pre-approval before you try to make an offer on a house is a must. Many mortgage lenders offer fully underwritten preapprovals, which means your credit has been checked and your finances verified. It’s basically an “all-clear” for your mortgage loan, except you haven’t found a house just yet. With these types of preapprovals, you can give sellers confidence. Even with a financing contingency in your contract, they know you’re a safe bet to buy their house and follow through. 2. Waive contingenciesThe easier you can make things for the seller, the better. And waiving contingencies? That’s one of the best ways to do that. This might mean waiving your:
Keep in mind that waiving contingencies is risky. Waiving the inspection could mean missing underlying issues or repairs on the property, while waiving your appraisal contingency could mean paying lots out of pocket if the home doesn’t appraise high enough. Make sure you talk to your agent about the risks and rewards of waiving contingencies if you’re considering this. 3. Increase your earnest money deposit Earnest money is essentially a good faith deposit. It reserves your right to buy the home, and if you back out of your contract without reason, the seller gets to keep it. If you really want to stand out, increasing your earnest money deposit is a great way to do it. It shows the seller that you’re serious about buying their house and that you’re willing to stake your hard-earned dollars on it. 4. Offer above asking priceMany times, cash buyers come in with lower-than-asking-price offers, largely because of the ease their transactions come with. If you’re up against a cash buyer that’s low-balling the seller, going above and beyond the listing price may be a way to stand out. You can also think about including an escalation clause, which increases your offer automatically if someone outbids you (up to a certain threshold, of course). 5. Include an appraisal gap guaranteeIn today’s hot market, it’s pretty common for appraisals to come in low. Naturally, this worries sellers (they don’t want you pulling out of the deal if the home’s appraised low). To relieve these fears, you might consider adding an appraisal gap guarantee to your offer. This tells the seller you’ll cover any discrepancy between the bid and the appraised value. This is typically only an option if you have some extra cash saved up outside of your down payment. Covering an appraisal gap would mean paying extra above and beyond the money you’re putting down with your lender. 6. Get personalYou can also write a personalized offer letter to the sellers detailing what you love about the home and why it’s the perfect fit for your family. Some buyers even include photos of their kids or pets with these. It’s a nice way to differentiate yourself from other buyers and really pull at sellers’ heartstrings. The bottom lineCash buyers are a common sight in today’s housing market, but they’re not invincible by any means. Talk with your agent, get an underwritten pre-approval from a mortgage lender, and go into your home search ready to compete. I hope this helps our buyers, as no one should feel they can't buy a home. Are there other ideas you have seen that work? If so, please pass along as I'd love to write a follow-up piece to include them. And if you or your clients have any questions, I am always here as a resource to help and I will do whatever I can to make the process easier. Reach out anytime; I am always here as you need. If you're currently working with a Noble Loan Officer, contact them today for more information on any of our programs. Otherwise, I am always available to discuss loan programs, co-branding, and other ways to add value to your business anytime. Sharing great information is one more way to add value to your day and business.
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