By Justin Lopatin
As the spring and summer housing markets begin to heat up, many first-time homebuyers (FTHB) will enter into this attractive buyers’ market. However, with all of the negativity surrounding the mortgage world, such a buyer can easily lose confidence.
Though the media has tried to make being a homeowner seem scary, we all know that this is an excellent time to buy; rates are low and the Illinois housing market has been relatively stable and resilient. With the correct education and tools, a good Realtor/mortgage planner combination has the power to diffuse negative perceptions.
How many loan officers have you dealt with during the housing boom that could not distinguish between an LTV (loan to value ratio) and a DVD? As familiar conforming loan products begin to fade away, so will the opportunity to obtain financing for the FTHB, or any other conforming purchase deals for that matter. In order to survive and thrive with your FTHB, it is imperative that your mortgage planner is proficient with Down Payment Assistance (DPA) programs, Federal Housing Administration (FHA) underwriting guidelines and has access to credit improvement software (Credit Xpert).
DPA: Down Payment Assistance Programs
A common impediment a FTHB faces when considering making a purchase is that pesky down payment. However, there are a myriad of solutions for a prospective homeowner to overcome this perceived hurdle. DPA’s like Nehemiah (getdownpayment.com), AmeriDream (ameridream.org) and Grant America have enabled thousands of FTHB’s to reach their dream of homeownership.
Typically, these organizations gift 1 percent to 6 percent of the purchase price for down payment and/or closing costs. The funds provided to the homebuyer are a true gift; no lien is recorded against the home without any expectation of repayment. In addition, the application process is seamless and almost every major lender allows it. Lastly, imagine the level of value this gives the borrower — you’ll knock their socks off. The only fee a borrower will incur is normally a small processing fee, which is around $495, a relatively small amount considering the thousands in free grants.
FHA: Federal Housing Administration
Recently, Fannie Mae and Freddie Mac, which are congressionally chartered corporations and the largest buyer of mortgages in the secondary market, have taken extreme risk mitigation measures. For example, beginning May 1, 2008, these entities will not accept any loan with a credit score of less than 680 and a 10 percent down payment. In addition, beginning January 1, 2009, the appraisal cannot be ordered from the loan officer, but must come directly from Fannie and Freddie. These lending milestones will bring back the “old school” underwriting philosophies and ensure good mortgage paper, but will eliminate a larger pool of potential buyers. Therefore it is essential for Realtors to understand other financing methods that will be available.
FHA, as opposed to Fannie and Freddie, has actually loosened up its lending guidelines and the rates are amazing. Typically, the minimum credit score is 580, assets are not needed, only a 3 percent down payment is required (this is where your DPA comes in) and currently the average rate is 5.875 percent. In addition, the maximum approved loan amount was just recently increased to $410,000. The main difference between conventional and FHA financing comes down to underwriting. In the FHA world, underwriters are trained to intuitively judge the strength of a file, rather than solely looking at guidelines. For example, if our borrower has challenged credit due to a job loss or medical reasons, an underwriter would need evidence of such compensating factors regardless of that person’s credit score.
From experience, I’ve found that many Realtors are uneducated and flat out fearful in terms of FHA. It is almost taboo to mention such a lending source. However, as the conforming market evolves and tightens, FHA loans will become the premier choice. Any Realtor/mortgage planner combination that ignores such a prophecy will undoubtedly lose extra revenue and career fulfillment.
Credit Xpert: Borrower(s) Incubation
Your FTHB should be treated like a fragile egg and nurtured in an incubator. It is evident that credit parameters have been tightened within every facet of lending. As previously mentioned, most lenders have even implemented a minimum credit score requirement for conforming lenders of 680 FICO. The irony with credit scoring is that most people understand the significance, but have not been efficiently educated. Previously, the most common approach for credit improvement involved hiring a third party company for a large fee, which typically takes months to correct. Most importantly, this process would take away control and relationship building.
Credit improvement software is an invaluable tool in the incubation process. For example, Kroll Factual Data offers an in-house credit analysis and improvement tool for mortgage planners known as Credit Xpert. Preliminarily, the program thoroughly dissects a credit report and explains the positives and negatives of the borrower’s pay history relative to each bureau (TransUnion, Experian and Equifax). Next, the mortgage planner can run simulations. For instance, asking the system what actions a borrower will need to take in order to raise the score “X” amount of points. Typically, any recommended actions are easy and from personal experience, raise a borrower’s score within two weeks. Additionally, this service is free to both you and the borrower. What could be better?
The world of financing feels nothing like it did two years ago. It is amazing to see how the lending industry has evolved and how significant of a role the mortgage planner, not loan officer, has become in ensuring a proper financing path.
Implementing the aforementioned tools will ultimately result in more units closed and consistent revenue, and will also separate the flourishing companies from the ordinary. Do not let the negativity in the industry diminish the confidence and skill level that it takes to be successful. Those that want to prosper have already begun to adapt, and have accepted the ever-evolving market. Now is a great time to buy, so go out a find your superstar mortgage planner and create successful ideas together.
Justin Lopatin is a mortgage planner at American Street Mortgage Company with a specialization in first-time homebuyer financing. He can be reached at 312.376.3760, or by e-mail at [email protected]
Copyright 2008 Agent Publishing LLC