Takeaways:
- Understanding the different mortgage options and products is the single most important value-add agents can bring to their buyers and sellers.
- Today’s mortgage products are diverse and designed to meet the financial needs and considerations of buyers in different markets and circumstances.
- In the end, matching a buyer to a property is as much an art as a science, but matching a buyer to a mortgage requires information.
There’s a lot of talk about value-added services in real estate, but buyers and sellers would agree that the most important value-add is useful information.
Sure, a knowledgeable real estate agent knows traffic patterns, school districts and how to create curb appeal, but the most critical insight an agent should possess is mortgage knowledge.
Simply put, not every buyer should apply for a 30-year mortgage loan, let alone consider that option. Today’s mortgage products are diverse and designed to meet the financial needs and considerations of buyers in different markets and circumstances.
Taking the time to understand a buyer’s unique situation moves an agent beyond the skill set of finding a property and into the realm of real estate expert — where knowledge builds professional authority and credibility.
Offering guidance to buyers about the mortgage process begins with asking the “holy trinity” of mortgage lending questions:
- How long do you plan on living in this home?
- How much of a down payment can you afford?
- What range of monthly payments can you afford?
These questions are simple, but a buyer’s answers help clarify complex considerations and narrow the field of appropriate mortgage options.
Narrowing the field by examining the options
A 30-year-conventional loan is as American as apple pie and the American dream itself. However, the truth is that few people stay in a home for 30 years anymore.
For buyers whose lifestyles or goals make it likely that they will move in a decade or less, reviewing other mortgage options is a matter of dollars and sense.
Although buyers appreciate that a conventional 30-year-mortgage provides the stability of a lower monthly payment, few realize that during the first five or six years, the lion’s share of the mortgage payment (70 percent) is applied to the interest on the loan, not the principal.
Moving from a property before equity grows might have unintended financial consequences. Additionally, for buyers with less than the requisite 20 percent down, the cost of private mortgage insurance (PMI) can add hundreds of dollars to a monthly mortgage payment without building value in any way.
If a 30-year loan is appropriate, and PMI is an issue for buyers, other options might be possible.
For some buyers, a 15-year-mortgage, with its lower rate and slightly higher payment, might be more attractive because 60 percent of each payment is applied to the principal, which builds equity more quickly.
For other buyers with shorter time horizons or down payment challenges, affordability and first-time loan options might be ideal.
Affordability programs put homeownership within reach for low- to moderate-income individuals and families. Federal Housing Administration (FHA) loans typically require a 3.5 percent down payment, while Fannie Mae loans typically require 5 percent down.
Although FHA and Fannie Mae loans both require PMI, a new Fannie Mae affordability program allows a modest 3 percent down payment to qualified buyers. Additionally, regional lenders might provide attractive affordability options.
TD Bank’s Right Step Mortgage, for example, offers qualified first-time buyers an alternative to FHA loans: a flexible down payment option and no PMI.
An agent’s understanding of affordability programs can help qualified buyers leave the sidelines and finally enter the marketplace.
Another mortgage product that can make homeownership more affordable is the adjustable-rate mortgage (ARM). Because ARMs are tied to an index benchmark for a fixed period, they initially provide a much lower monthly payment and interest rate than a 30-year mortgage.
ARMs can be wise choices for those who expect to upsize, downsize or relocate before the initial rate begins to adjust. For example, some regional lenders offer 7/1 loans that remain stable for seven years before adjusting each year thereafter.
The demand for ARMs will likely increase as future interest rate hikes take place and give buyers even more choices.
Lastly, construction-to-permanent loans provide flexibility for buyers who want to improve or add to an existing property. These loans are ideal for regions where buildable land is scarce and existing properties are older and require updates and renovations.
Our construction-to-permanent loan, for example, allows buyers to purchase a property and finance renovations with one loan. They include terms for completion of construction (typically a year) and require interest-only payments for the first 12 months on 80 percent of construction costs.
After the first year, when construction is complete, principal and interest payments on the entire loan apply. Construction-to-permanent loans are ideal for buyers purchasing their vision for a home, rather than its current condition.
In the end, matching a buyer to a property is as much an art as a science, but matching a buyer to a mortgage requires information, pure and simple.
Understanding mortgage options and recommending lenders who can meet buyers’ needs are value-added propositions that resonate long after a sale is made.
Considering a buyer’s best mortgage options as part of the sales process automatically builds an agent’s credibility as a real estate professional and helps create clients for life.
Ray Rodriguez is regional mortgage sales manager for metro New York City at TD Bank. You can follow him on LinkedIn.