A creative way to reach a home sale

A creative way to reach a home sale

Jul 25, 2014

Kenneth R. Harney

WASHINGTON – If I pay money to your lender to lower your mortgage rate – permanently – will you make me a better offer on my house?

That’s a question that could become more commonplace as home sales slow, prices erode and mortgage rates increase. The cooling off trend is well underway in many areas, according to Veros Real Estate Solutions, a Santa Ana, Calif., analytics company. Veros’ forecast for the coming year, released last week, reported that prices in “all but the most upbeat [markets] are slowing” across the country, and one out of five markets could see year-to-year declines.

But could mortgage assistance by sellers for buyers help cushion the impact of these market shifts, bridging the gap between what owners want – or need because their equity positions are thin – and what increasingly picky buyers are willing to pay?

Realty agents and lenders in some areas believe the answer is yes. Agents have begun touting “seller-assisted below market rate financing” on the lawn signs they post outside their listed homes. Others are boning up on a marketing technique that’s long been used by home builders but rarely seen in resale transactions in recent years- interest rate buy-downs.

The idea is straightforward. To make their house more attractive to buyers as a financial proposition, sellers can offer to lower buyers’ long-term monthly mortgage expenses. The sellers achieve this by paying money upfront to the buyers’ lender in order to reduce the interest rate. The lower rate continues for the life of the loan.

The reduction might cost the sellers two or three “points” – a point is 1 percent of the mortgage amount – and produce a reduction in the buyers’ note rate of one half of a percent. The points paid by the sellers represent interest paid in advance. A larger cash payment of points would produce larger rate reductions.

David H. Stevens, president and chief executive of the Mortgage Bankers Association, says “we did a ton of buy-downs” on resales during 2006-09 when he was a senior executive with Long & Foster Cos., the country’s largest independent realty brokerage. In the right circumstances, Stevens believes, “they can be a pretty good opportunity” for sellers and buyers to come together on a deal, even with today’s lower mortgage rates. It’s all a matter of making sure the numbers work for both parties.

Oray Nicolai, a senior mortgage banker with Access National Mortgage, a subsidiary of Access National Bank, says rate buy-downs are particularly effective because they magnify the impact of the sellers’ financial concession by spreading it over many years. Buyers “keep getting the benefits of lower monthly mortgage payments for as long as they have the mortgage,” he notes.

Nicolai, who assists realty agents in structuring and presenting rate buy-downs to sellers and purchasers, provided this recent example. Buyers made an offer $50,000 less than the seller was willing to accept. By buying down the purchasers’ note rate by half a percentage point – from 4.25 percent to 3.75 percent fixed for 30 years – the sellers were able to get the price they needed. Meanwhile the buyers ended up with the same monthly principal and interest payment at the 3.75 percent rate they would have obtained on a conventional fixed-rate loan at 4.25 percent with a 20 percent down payment. The sellers’ buy-down cost them $13,600 – an expense that under IRS rules was deductible by the buyers – and the sellers ended up netting $36,000 more than they would have had they accepted the buyers’ initial low offer.

But buy-downs can have important limitations- Some purchasers want seller concessions in the form of contributions to closing costs. Or they simply want a lower sale price rather than reduced monthly mortgage expenses.

Plus buy-downs don’t work as well when the capital markets demand extra cash to buy down rates. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says a half percentage point note rate reduction may cost more than two points, forcing the seller to net less on the sale. Loan officers can usually explain how much of a rate break the current market is offering when points are paid up front.

Bottom line- Agents, sellers and buyers should at least be aware of the buy- down option. Then, if the numbers work and the buyer is open to a little creativity, make it happen.

The red flags bankers see

The red flags bankers see

Jul 18, 2014 Kenneth R. Harney

WASHINGTON – Qualifying for a mortgage for large numbers of home purchasers not only is a tough challenge but one that ends unhappily – they get rejected.

The reasons for the turndowns typically involve multiple factors- below-par credit scores, inadequate documented income to support the monthly payments, little or no savings in the bank.

But a new survey by credit-score giant FICO offers buyers a rare peek inside the heads of credit-risk managers at financial institutions across the country and in Canada. Researchers asked a representative sample of them what single factor in an application makes them most hesitant to fund a loan request – in other words, what’s most likely to prompt them to say no.

The results provide practical insights to anyone who is thinking about applying for a mortgage. Tops on the list- Surprise. It’s not your credit scores. It’s not how much you’ve got for a down payment or what’s in the bank. It’s your “DTIs” – your debt-to-income ratios. Nearly 60 percent of risk managers in the FICO study rated excessive DTIs their No. 1 concern factor – five times the percentage who picked the next biggest turnoff.

Yet many new buyers have only a rough idea in advance of an application – even for a pre-approval letter – about their own DTIs, how lenders view them, and what sort of limits they’re likely to encounter.

Since they are so important to a successful application, here’s a quick overview on what goes into DTIs and why they are such a big red flag. Debt-to-income ratios for home loans are the most direct indication to a bank about whether you are going to be able to afford to repay the money you want to borrow.

Debt ratios for home loans have two components- the first measures your gross income from all sources before taxes against your proposed monthly housing expenses including the principal, interest, taxes and insurance that you’d be paying if the lender granted the mortgage you sought.

As a general target, lenders like to see your housing expense ratio come in at no higher than 28 percent of gross monthly income, though there is flexibility to go higher if other elements of your application are viewed as strong. In May, according to mortgage software and research firm Ellie Mae LLC, the average borrower who obtained home purchase money through investors Freddie Mac and Fannie Mae had a housing expense ratio of 22 percent. Federal Housing Administration-approved borrowers had average housing expense ratios of 28 percent.

The second DTI component – the so-called back-end ratio – measures your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments and others. Under federal “qualified mortgage” standards that took effect in January, your back-end ratio maximum generally is 43 percent, though again there is wiggle room case by case.

Most lenders making loans eligible for sale to Fannie or Freddie prefer not to see you anywhere close to 43 percent. In May, according to Ellie Mae, the average approved home purchase applicant had a back-end ratio of 34 percent. Even at FHA, which tends to be more lenient on credit matters than Fannie or Freddie, the average back-end ratio for buyers was 41 percent. The average for denied applications was 47 percent.

A good place to learn more about DTIs and to compute your own is Fannie Mae’s consumer-friendly “know your options” site (www.knowyouroptions.com), which includes calculators and other helpful tools.

The new FICO survey found that the second leading cause of concern for loan officers is “multiple recent [credit] applications.” Lenders spot these on your credit reports and take them as signals that you are seeking to add on even more debt, which could affect your ability to repay the mortgage money you’re asking them to give you.

In third place as an instant turnoff- your credit scores. Most lenders want to see FICO scores well above 700 – Fannie and Freddie averages were in the 755 range in May, FHA average approved scores were a more generous 684.

Bottom line here- If you want to be successful in your mortgage application, be aware of these key turnoff points for lenders and take steps to avoid the tripwires. Most important- Postpone your purchase until your DTI ratios tell you – yes, you can afford the house you want and lenders won’t reject you out of hand.