Our board member, Joanne Rogers, VP of Mortgage at Guaranteed Rate, explains how our current "hot" housing market is not burning for everyone.
Interested in purchasing a new home in 2021? Chances are you have witnessed the current housing boom.
Surging pandemic-related demand and a shortage of homes have led to intense buyer competition unlike anything seen in decades.
Gone are the days where you could offer five to ten percent under list price with a standard mortgage pre-approval letter and reasonably expect to sign a purchase contract. Now with many homes receiving multiple offers, the list price is merely a jump-off point. Buyers are offering well over asking and still getting outbid. They are waiving mortgage, inspection, and appraisal contingencies in the hopes of standing out in the large pool of competitors.
To make matters worse, when weighing which offers to accept, a seller and listing real estate agent’s perception of a potential buyer’s loan qualifications has meant that many highly qualified buyers are left out in the cold. They are basing their decisions solely on loan type and down payment.
And lack of excess liquid funds to meet appraisal shortfalls are causing borrowers with lower down payments to be disqualified or eliminated from consideration (lower down payments are common with FHA, VA, Conventional 3% down options, and affordable housing programs such as IHDA). Banks are prioritizing more ‘favorable’ financing terms, including large down payments.
Borrowers are now getting the mortgage terms that the sellers want to see, not what is best for them or their families.
I once had a client opt for a 3.5% conventional interest rate with a $225/month higher payment than an FHA loan with a 2.25% interest rate that was deemed riskier by the seller. *
But there are several things that potential buyers can do to improve their home buying prospects.
The first is to work with a local, reputable mortgage lender who will complete a credit check. This allows the borrower to reach out to a licensed credit professional if necessary, leading to a better fit with conventional financing. And it’s best to submit all requested financial documents early on so that the buyer has a very strong pre-approval letter.
I frequently have real estate agents contact me personally for more information on my pre-approval process. The more information I have on the client, the better I can advocate on their behalf. It is also possible to complete a full credit underwrite even before identifying a property (contingent upon approved appraisal). Many contracts are signed because the seller can then connect with a buyer on a personal level.
I often educate real estate agents and sellers on why loan products such as FHA, VA, or those with little or no down payment make so much sense for the buyer and require a full underwrite and often a more stringent underwrite than conventional loan products. Furthermore, I explain that a large down payment also does not necessarily make a creditworthy applicant.
I also advise real estate agents to provide closed sales information to the appraiser to support the contract price. A local appraiser with good knowledge of the market can help ensure that the appraisal won’t come in low, removing the need to bring extra cash to closing to make up for an appraisal shortfall.
Lastly, it may be possible to increase the down payment percentage by writing a seller closing cost credit into the offer. The net proceeds to the seller are the same, but it alleviates the need to bring cash to close beyond the down payment, leaving funds available to use in other ways. It is possible to overcome seller hesitancy through a team approach with the buyer, real estate agent, and loan officer. We are all working together for the same purpose, to help realize the dream of homeownership.
It’s important to remember that borrowers are subject to credit and underwriting approval and that not all applicants will be approved for financing. Restrictions typically apply, and it’s good for borrowers to reach out to their loan officer for current rates and more information before making any financing decisions.
*Results not typical. All financing scenarios are different.