With rates around 6.9% and home prices still near record highs, homebuyers are demanding that their loan officers provide options to lower monthly mortgage payments as much as possible.
Michael J. Barnes, a branch manager at Mann Mortgage, recently had a client who planned to live in a new home for five years before selling it. The client requested a cost analysis to compare monthly payments on a mortgage at 7.5% versus a 6.5% mortgage rate with a permanent rate buydown.
His client would pay $4,000 to buy down the rate by one full percentage point (100 bps) and save $7,880 over the five-year period he planned to keep the home.
“In that client’s case, it made sense to pay to do a permanent buy down,” Barnes said. “There were too many things going against the client to do a temporary buydown, knowing that he’s going to keep it for a maximum of five years.”
To get the best product for the borrower, Barnes, like many LOs these days, has had to run different scenarios based on the client’s preferences, including the mortgage term, down payment and whether the purchase would be a primary residence versus investment, as that would affect the pricing of LLPA fees.
LOs across America are challenging clients to think about their financial situation several years down the line, asking about plans for kids, how much is being saved in IRAs/401Ks, and more. These days, there’s much more to the job than, “Here’s much you qualify for,” LOs said.
“What I’ve seen is that the really good mortgage advisors today are taking time to understand each borrower’s circumstance, short term goals, long term goals and put together a plan with them of how long are they going to be in the house, how much do we need to put down on that house, and understand not every loan is created equal for every person, depending on what their goals are,” said Brian Covey, executive vice president of Revolution Mortgage.
Understanding the borrower
Randy Kaufman, a senior loan originator at Notre Dame Federal Credit Union, offered his client the option to float his rate for a transaction that is set to close at the end of June.
When Kaufman’s client’s offer was accepted at the end of May, the client anticipated that the debt ceiling legislation would pass and that the Federal Reserve would pause hiking rates in the upcoming June FOMC meeting, which in turn would bring mortgage rates down.
“They didn’t want to lock it yet, they wanted to let it float. So they’re saving themselves some money by letting it float,” Kaufman said.
Being conservative never hurts and being strategic about the market is important, Jared Sawyer, a sales manager at loanDepot, said.
loanDepot offers borrowers the option to float rates but Sawyer sees the majority of his clients want predictability when it comes to rates – opting to go with a permanent rate buydown.
“I would say about 95% of first-time homebuyers want to know what their payment is going to be out of the gate. They don’t have to worry about that changing on them,” Sawyer said.
Especially when the seller is willing to give concessions, the buyer is able to get a credit for closing and contribute to buying down points.
Seller concessions are abundant in some of the markets that have cooled – including Oregon and Arizona – and his clients are able to take advantage of that, Sawyer noted.
“I let them know their options. These are the options you can do and here are the pros and cons of this (…) About 90% of the conversation we’re having, [I’m hearing] we don’t want to look at something temporary. We want to make sure we know what our payments are going to be,” Sawyer said.
Every scenario is different and he finds some of his experienced buyers – those who bought their first homes already are open to the option of a temporary buydown, according to Sawyer,
Temporary buydowns often make more sense for buyers planning to live in the home long term as they are more likely to have a refi opportunity during that time period, Barnes noted. Also, seller-funded temporary buydowns may not be available depending on how hot market conditions are.
A game of conversion for loan officers
“The knowledge of what the market is doing and knowing why it is happening is critical right now more than ever,” Jose Valenzuela, a loan officer at Motto Mortgage, said. “If you can paint a picture for the borrowers explaining potential scenarios both good and bad, it’s also critical.”
Valenzuela has been able to create a high pull-through closing after retaining pre-approved clients thanks in part due to weekly check-ins with his clients. Being a “trusted advisor” is important in an environment where buyers are trying to find their homes. It’s important to focus on what the buyer might be looking for, Valenzuela said.
For instance, having a nice yard for a borrower’s son could mean they can pass on to their child like their parents did for them, he noted. Some borrowers are focused on legacy to leave for their child’s future.
“Have a meaningful conversation about ways to focus on legacy like a living trust, a financial planner (…) This will keep you in the driver’s seat against almost any other loan officer,” he said.
Many loan officers are hoping for the market to turn, which in turn would bring back some refi business among homebuyers who locked in rates at close to 7% levels at the latter half of 2022.
“I would not hold my breath on that I would plan on this environment being consistent. You have to work three times as hard to make the same paycheck you did last year in this environment,” Sawyer said.
Ultimately, it’s a game of conversion. Loan officers need to take more time with borrowers and ask better questions to secure loans, Covey said.
“Even if you’re talking to fewer people, if you can convert at a higher percentage, you’re still getting the volume and velocity of applications and closings that you desire.”