Mortgage Smarts for Real Estate Professionals

With today’s tight inventory market and rising interest rates, you need to know more than ever about mortgages. And the latest report from Zillow shows that 55% of buyers rely on their real estate agent for help with understanding mortgage options. Having mortgage smarts as a real estate professional gives you credibility and adds value to your agent-client relationship. It also helps move the transaction process along without unwanted surprises. Following are tips on mortgage smarts for real estate professionals so you can better assist your clients.

BUILD SOLID RELATIONSHIPS WITH MORTGAGE BROKERS IN YOUR MARKET

Get to know at least two or three reputable, reliable, get-er-done mortgage brokers in your market. Include them in your open houses and marketing campaigns so you can get the best results driven by teamwork. There is a natural synergy between real estate professionals and mortgage brokers, so make sure you take advantage of that dynamic. They will also help your mortgage smarts.

FREDDIE MAC and FANNIE MAE

Who are these “people” and why should you know them? Freddie Mac and Fannie Mae were created by Congress to provide liquidity and stability in the US mortgage market. They provide funding to thousands of banks in America so that your buyers can borrow money to buy a home. They also attract private lenders through “secondary” markets, which create additional money available for borrowers. Both are shareholder-owned companies that operate under a congressional charter.

NUMBERS TO KNOW

• Monthly mortgage payments shouldn’t exceed 28% of your buyer’s gross income
• Buyer’s total debt payments shouldn’t exceed 36% of your buyer’s gross income

Note that self-employed buyers are going to have a more difficult and lengthier loan process and will usually have to show at least three years of business tax returns. Have your buyers check out The Street for help with the math on mortgages.

KNOW THE MOST COMMON MORTGAGES

1. Conventional Mortgages – Usually amortized over 30 years with a set interest rate; interest rates are based on the 10-year Treasury Rate
2. Government Backed Loans (FHA, VA and USDA) – Do your research on these loan types as they can affect the outcome of an offer being accepted or not and sometimes can’t be used on certain types of properties. They will also require their own appraiser. But they can be great for first-time buyers, buyers with limited down payments, buyers will less than stellar credit, and VA buyers.
3. ARM Loans – Adjustable Rate Mortgages are based on different “indexes” which will affect the interest rate of the loan. As its name suggests, ARM loans have interest rates that fluctuate through the life of the loan, which is typically no more than five years with a subsequent balloon payment demanded. Learn more about ARM Loans.
4. JUMBO Loans – Loans are considered “jumbo” if the amount of the mortgage exceeds loan-servicing limits set by Fannie Mae and Freddie Mac. Currently they are $726,200 for SFR homes in all states but Hawaii, Alaska, and a few federally designated high-cost markets where the limit is $1,089,300.
5. Bridge Loans – These typically have a higher interest rate and demand excellent credit scores with low income to debt ratios. Bridge loans are handy when a new home is purchased prior to an old one being sold.
6. Interest Only Loans – The loan payment will be for interest only, typically with a balloon payment required at the end of the loan unless the loan converts to a fully amortized loan after a certain amount of time.
7. HELOC Loans – A Home Equity Line of Credit can be given based on the homeowner’s equity as determined by the difference between the appraised value of the home and current mortgage balance. HELOCS are mainly used to refinance personal debt or add to a down payment.

ABOUT INTEREST RATES

• 30-Year Fixed mortgage rates are tied to the 10-year Treasury Rate
• ARM rates are tied to the 1-year treasury and LIBOR
• HELOCS are tied to the 11^th Dist. Cost of Funds, the Federal Discount Rate and the Red Funds Rate

MORTGAGE CLOSING COSTS

The cost of obtaining a mortgage includes loan origination fees, appraisals, fees, title insurance and escrow fees. They vary based on the type of loan and the lender. The typical cost of a loan is about 3% of the loan amount. Make sure to advise your clients of the following:

1. Closing costs are usually in addition to the down payment, although sometimes they can be rolled into the loan amount
2. Mortgage payments are due at the end of the month, unlike rental payments which are due at the beginning of the month

DOCUMENTS NEEDED TO GET A HOME LOAN

1. Proof of Income (W-2s, tax returns, pay stubs)
2. Credit History showing credit card balances, employment verification, recent bank statements, ID and last 10 years of address history
3. Other documents as required

THE APPLICATION PROCESS

Here’s what your buyers can expect:

1. PreQualificaion
2. PreApproval
3. Loan Application submission
4. Underwriting
5. Appraisal
6. Title Search
7. Closing

Each steps involves the collection and verification of documents and information, culminating in the final loan approval and property purchase.

LOAN TIMELINE

Expect the process to take as long as 60 days and as short as under 30, with 45 days being about average. Loan approval can take much longer if there is a problem with the appraisal, a lien on the property, title problems, and so forth.

WHAT HAPPENS AFTER MORTGAGE APPROVAL

Your buyers will get a loan commitment letter and you’ll proceed to the closing process, which involves signing documents, transferring funds, and ultimately acquiring the property title. In escrow states, loan documents are usually signed a day or two before closing. Each state has different requirements as to timing and who handles the paperwork. Make sure you know your state requirements so you can counsel your buyers on what to expect.

WHAT BUYERS SHOULD DO DURING THE LOAN PROCESS

Your buyers should:

• Shop around for the best rates
• Know how much money they can borrow
• Expect loan closing costs of about 3% in addition to the down payment
• Lock in rates for 60-90 days when first applying
• Choose the right type of mortgage for their situation
• Get a PreApproval (not just a PreQual)
• Know that their credit scores will affect their interest rate and ability to get a loan
• NOT make purchases that aren’t absolutely necessary while under contract – this can cause them to become disqualified for the loan

All of this may sound like a lot of work in addition to the work you already do. If you’re partnered with quality mortgage brokers, they will shoulder some of this as well so it won’t all be on you. Just remember that when you can help your buyers successfully navigate the complex world of mortgages, you will close more deals. And that’s a win-win for everybody..