Navigating the Mortgage Market

This piece originally appeared in the June 2022 edition of MReport magazine, online now.

June is National Homeownership Month. While it is a time to celebrate homeownership and the benefits it brings to families, neighborhoods, and communities, it is also a time to examine the barriers many homebuyers may be facing.

It almost goes without saying that borrowers today are struggling in their efforts to purchase a home. Prices are reaching new heights for many reasons. First, housing demand is outstripping the available supply, contributing to strong appreciation in home values. Additionally, increasing labor and material costs, as well as supply chain challenges, have caused new home construction costs to rise, so adding new inventory still poses an affordability challenge. What’s more, all-cash offers, institutional buyers, and frequent bidding wars are driving home prices even higher—sometimes over asking price and even above the appraised value—and snapping up inventory faster than some buyers can move.

If this was not enough, higher interest rates are reducing homebuyer purchasing power and rising inflation rates are decreasing home affordability.

While this long list of challenges is affecting buyers across the board, it is particularly impacting first-time homebuyers. Some of them may not have adequate savings and certainly do not have home equity to help them in today’s hectic market.

However, whether it’s a borrower’s first time buying a home or not, the lender is without a doubt one of the greatest resources in helping the borrower navigate through choppy seas to their desired destination of homeownership. Therefore, lenders must be more prepared than ever to help borrowers address affordability concerns so that they can achieve their dream of homeownership.

Sharpen Product Knowledge to Match Buyers With Their Most Affordable Option
One of the most important things lenders can do is sharpen their knowledge of all products. As guidelines are expanding, and market shifts affect the attractiveness of different products, it’s important for lenders to understand the various options available to best meet the borrower’s mortgage financing needs—especially those options that may be outside the norm or outside the lender’s usual comfort zone. Today’s complex market requires some creativity on the lender’s part to find the right solution for each borrower’s unique situation.

Take adjustable-rate mortgages (ARMs), for example. Due to rising interest rates, ARMs may provide a better alternative to a traditional 30-year fixed-rate loan for some borrowers. An ARM can help borrowers obtain a lower rate and thus a lower payment for the initial, fixed-rate period, whether it be five, seven, or even 10 years. ARMs are great for borrowers who will likely sell their home within that initial, fixed-rate period and are also great for those who anticipate strong earnings growth during those initial years.

Lenders also must be familiar with their low-down-payment products that can help borrowers with affordability. There is a plethora of options that lenders should be familiar and comfortable with, such as U.S. Department of Veteran Affairs (VA) loans, the U.S. Department of Agriculture’s Rural Housing program, Housing & Urban Development (HUD) Section 184 Indian Home Loan Guarantee program, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs, the standard 97% loan-to-value (LTV) products offered by Fannie Mae and Freddie Mac, and Federal Housing Administration (FHA) loans.

Additionally, there are state, city, and county Housing Finance Agency (HFA) programs that can provide down payment assistance, some as high as 5%. Another great option to help ease affordability concerns are portfolio loan programs offered by lenders or investors. Because the lender sets the standards, portfolio loan programs can help borrowers who might have a lower credit score or limited-to-no savings.

Of course, mortgage insurance products also offer borrowers an affordable homebuying option. While some are paid monthly, others can be paid upfront. Some of these upfront options, like a borrower-paid single premium, can even be financed into the loan and will actually lower the borrower’s payment without increasing the cash-to-close. Split premiums present yet another option, requiring less upfront cash than a single premium and, instead, tacking on a smaller monthly payment.

Another type of homebuyer assistance program designed specifically to help lower-income families afford homeownership are Mortgage Credit Certificates (MCCs). The programs provide qualifying homebuyers the ability to claim a dollar-for-dollar tax credit (up to $2,000 per year) for a portion of mortgage interest paid.

This credit is available so long as the borrower lives in the home, so borrowers looking to stay in their home for a while can see significant savings with MCCs. If none of these options are sufficient to help a particular set of homebuyers manage affordability, there are still more products that might hold the answer. Non-qualified mortgage (non-QM) products are a great solution for borrowers who might not qualify using traditional underwriting standards. And for homebuyers who are struggling due to inventory issues, a construction-to-permanent product or even a renovation product could be the answer to obtaining a house that meets their specific needs.

Each borrower’s situation will be different. Some may lack in savings while others have low credit scores or have affordability challenges. Whatever the case may be, lenders should know the variety of product options they can offer for different borrowers’ specific situations. There is no one-size-fits-all product that will solve the affordability issue for everyone, but there are plenty of products from which borrowers may benefit.

Next Steps
Once lenders are familiar with the broad options, they have available to pair borrowers with the products that best meet their needs, there are a few more things they can do to help get borrowers into homes.

First, lenders must set and manage expectations—especially in today’s homebuying market.

Educating borrowers on their specific process will also help lenders prepare their borrowers for how they can best sail through the homebuying process. Be sure to provide borrowers with product and loan structure options, explain the features of those options and lay out the pros and cons for them so they can make an informed decision. Communicating clearly and consistently from start to finish makes a huge difference in ensuring high customer satisfaction and in successfully getting borrowers into their home.

Lenders should also work closely with referral partners and interested parties such as real estate agents and builders. Setting and managing expectations along with timely communications are key to creating a smooth transaction and in increasing the likelihood of future referrals.

To strengthen the borrower’s negotiating position with a prospective seller, it is paramount that a lender obtain a strong preapproval. Once the borrower is ready to make an offer on a home, the lender can collaborate with the real estate agent to ensure that the terms of the contract align with the borrower’s goals and unique situation.

Lenders have critical insights into the borrower’s financial situation that may not be seen on paper and these insights can help the real estate agent make an offer that is not only affordable but also sustainable for the borrower.

Making an Impact
There are many factors that continue to contribute to a challenging homebuyer market.

Lenders must be well-prepared to match borrowers with the right product solutions to help them get into homes.

Education is key—for lenders, borrowers, and referral partners.

In today’s market, it is easy for buyers to count themselves out before they even begin. However, knowing the options available to them can help borrowers get into an affordable home so they can begin enjoying all the benefits that come with homeownership.

Everyone in the industry has a part to play in helping combat the affordability issue. Whether you’re a lender, real estate agent, or builder, everyone has the power to help borrowers find an affordable path to homeownership—not just during National Homeownership Month, but for every month to come.

The statements in this article are solely the opinions of Chris Garagusi and do not necessarily reflect the views of Enact or its management.