We interviewed Barbara Hart with Nations Lending on the radio and she has so many helpful steps and tips when it comes to financing a home! There are many details involved in purchasing a home so even if you aren't a first time home buyer, it's always helpful to refresh your memory! If you are a first time home buyer, keep reading what Barbara had to say or listen here!
What is the difference between pre-qualification and pre-approval?
Pre-qualification is an opinion and that is very different from a documentation standpoint. My very first step is finding out what is important to my client. If I don't know what is important to my client, then I can't even begin to give them financial advice that makes sense for them and their situation. I then structure the loan around their income, what their financials resources are, down payment and we can talk about that more later...
A pre-approval is where I have the client’s documentation, I've had a very detailed conversation with them, and I know how much of a monthly mortgage payment they are comfortable with.
A seller should absolutely be looking for a pre-approval that has been run through the Automated Underwriting System (AUS). Again, an offer should not be written if they don't absolutely know they can close the transaction.... it's a disservice to everybody.
What is the advantage of going to a mortgage company and how long is the process?
I think the most important thing a buyer can do is prepare. I have client's that I have worked with and have sat in my file drawer or computer for a year and half. They come into the market and their situation changes, so they pull out of the market and then they come back. I have already had a basic conversation with them and gathered basic documentation so we can sit back and wait for them to find a house when they are ready.
There is nothing worse than you guys finding the perfect house for a buyer and then they have to scramble and we have to come up with a financial strategy on the fly while they are trying to write an offer, figure out what the monthly payment is going to be and if it’s affordable and asking if they are in a multiple offer situation and what kind of a seller concessions they should ask for…I mean when there are 1,000 different moving pieces and it's stressful enough! Our buyers don't need to be running around looking in their file drawer for their W-2 forms, right?
It is so much easier to begin the process ahead of time and be ready when you find the house!
What is your approach to lending and what do you see a major limiting factor for buyers?
The custom approach is key for me and how I look at it. It's not just a, "Ok, how much you make? Here’s your loan, here's your rate, ok bye".
I find out a little bit more about the client’s lifestyle. Maybe they have a child in private school, maybe they have an elderly parent that they are responsible for taking care of and that’s impacting the finances. I’m going to give that client a little bit different advice than from somebody who has a lifestyle where their home is everything to them… they don’t travel, they don’t like to go out to dinner, and they are very frugal. There are going to be a couple of different advice points that I would give them.
As far as a limiting factor or the biggest challenge that we’re seeing, right now it would be affordability. We’ve seen unprecedented price increases over the last three years and couple that with interest rates more than doubling, you have a double whammy of affordability.
What are some of the major things that we can help clients overcome?
The first thing is down payment. The down payment is probably one of the most important things because it’s going to absolutely have an effect. I will coach my client to help with the affordability factor. I’ll coach them to talk to different family members about gift funds. There are a lot of people that have equity in their homes, there’s a lot of parents that would like to share their prosperity with their family before they pass on and so it can be a really great way to pass on that legacy. We are not limited to just one gift from one person. I just closed a transaction where we had three very substantial gifts from different family members. It’s all about…here’s that phrase again “custom tailoring” those financing solutions for the buyers. Another way we can do it, is just different types of loan programs.
The market is a little softer now. It was so competitive over the last couple years and a lot of times we can ask for the seller to give a concession instead of a price reduction. The seller gets the same net, but the buyer would have funds coming to help them buy the interest rate down. There are a couple of different ways that can be structured. A permanent buy down or a temporary buy down. A temporary buy down is cool because it helps with the affordability factor. Maybe someone is super qualified, but for whatever reason they’re not comfortable making a payment at 7%, but they’re sure a lot more comfortable making the payment at 4%.
We also we have a “3-2-1 buy down” and what that means is that the interest rate would be 3% less. So in that example of 7% the interest rate would start at 4% ,the first year and go to 5% the second year, 6% the third year and years 4 to 30 it would go up to 7%. Chances are at some point during that process, interest rates will probably drop, and they will have the opportunity to refinance that into something permanent. I want to make sure that people understand this is not an adjustable rate. It is a 30-year fixed rate, but there are just a million different ways to structure these buy downs and different people can pitch in to absorb the cost of that buy down and how those different strategies work would depend on each individual transaction and each individual borrower…. Are you sensing the theme here?!
Even the people in the jumbo market, you know the million dollar plus homes and all of that, we can really do a lot to ease that payment shock. We are one of the very few lenders that have a temporary buy down, even a 3-2-1 buy down we offer that on some of our jumbo products. That can really be the differentiating factor to mitigate those higher interest rates and make it more affordable.
We have heard from some of our clients that they are renting right now, and they are just sitting and waiting for the market to drop off a cliff. They don’t want to do anything; they want to wait for some big catastrophe to happen and then they’re going to get back in the market.
What would you say to them?
They’re going to be waiting a while. I would say the first thing is to talk to a lender because there are so many myths. People think they have to have 20% down or $100,000 down. They don’t! There are programs that require 5% down, 3% down and in many cases 0% down like a USDA. We do a lot of USDA, FHA, and VA doesn’t require a down payment. We’ve got a lot of different options, there are grants out there. There are a lot of different options so don’t let that be the thing that hold you from owning real estate because we all know the benefits. The other thing that I hear is that people have a home to sell and they’re very nervous about selling that home because it takes a lot longer to find that unicorn out there. I hear that objection a lot from a lot of older clients who want to downsize, and we do have a program that we can use this scenario. It’s called “Cross Collateralization”. We use the equity from the current residence to buy the new which is great because then they can stay in their home until they find their next home.
The biggest thing I think that people don’t realize is that there is a direct correlation between home prices and interest rates. The more affordable a home is, the higher people can afford to pay for it. We just saw that starting in 2020. One of my colleagues put some numbers together and we were astounded.
Let’s take a sales price in Bend of $700,000. If the interest rate was to go down by a percentage point, there is a direct correlation that that will result in a 5% appreciation in the value.
The fence sitters waiting for the interest rates to drop need to get in the game. Let’s talk about a different strategy to make it happen because otherwise you’re going to end up paying 5% more for a house and it will cost you a lot more in the long run. If you’re waiting for rates to get clear down to the fives or fours, home prices will rise.
Most people are buying a home for shelter over their head and an investor just needs to cash flow It’s about having a roof over your head and having a place to call home. Your landlord isn’t going to call you because you are the landlord. You’re not going to kick yourself out to sell the home and you’re not going to raise your rent. You’re getting a 30-year fixed rate loan which I call “built-in rent control”. You’re getting the equity instead of paying somebody else’s mortgage.
Carla: It isn’t bargaining down the price of a home that is always the best deal. For instance, let’s say somebody had a home for sale for $350,000 and they just love to negotiate. They want bargain it down to $320,000 but sometimes that is the best deal for the buyer. Am I correct?
Barbara: One hundred percent. I have yet to run an example where it wasn’t better for the client to get a concession from the seller as opposed to a price reduction. Then we take that concession and either use it for all the closing costs and a buy down. They can’t use it for the down payment because that’s a concession to sale.
I had a client come to me who said, “We can buy a $375,000 house” and I asked, “Where did that number come from?” They said, “Oh another lender we talked to” I said, “That’s nice, let’s have another conversation”. I help them to buy a $420,000 house with less down, less of a monthly payment because we had the seller kick in for a permanent buy down of their loan, and they had less of a payment and less cash to close and they got a better house.
Barbara J Hart
Personal Mortgage Advisor | NMLS# 331462
408-391-5030 | Cell Bend, OR | NMLS# 32416