(This is Part 2 of a two-part series. Read Part 1, “Loan approval tougher for prime borrowers, self-employed.”)
The days of easily obtaining mortgages are rapidly disappearing. Tougher lending standards are making it harder for buyers to qualify. To capitalize on this situation, you must understand how to navigate through the shifting lending environment.
Last week’s column outlined three different strategies to assist you when working with buyers and sellers in today’s new lending environment. Today’s column examines four additional strategies to help you and your clients successfully navigate through today’s tougher mortgage market.
4. Rates go up; lenders slow down
When there is a rate increase, the lending process slows down. There are a number of reasons for this. First, borrowers who have locked their loan are in a hurry to fund the loan before their lock expires. This means that lenders are swamped trying to process a backlog of loans. What can be very frustrating is the situation where the lender asks for “additional documentation” repeatedly. Each time the lender makes this request, it delays the loan approval date, often past the date of the lock. Once that date passes, the lender can increase the rate.
There are two ways to circumvent this situation: The first strategy is to tighten up the loan contingency date. Lenders will generally work with you to meet the approval date. The challenge is that if your buyers have not received approval, they will have to decide whether they will waive the loan contingency or walk from the transaction. Attempting to rush the lender usually doesn’t work. The best tactic is to keep in regular contact and to tell them how much you appreciate their help.
The second way to handle this situation is to apply at two different lenders. The lenders don’t like it, but it can be a way to make sure that your loan will be approved. You can also achieve the same result by going through a mortgage broker who represents a number of different lenders. If there’s a problem at one, they can easily shift to a different resource. Alternatively, numerous online lenders have multiple sources to fund their loans.
5. Appraisal problems
When the market value of properties is increasing, lenders are normally open to appraising property higher than the comparable sales, especially if there were multiple offers on the property. When prices are declining, however, the price the buyer agrees to today could be less than the property will be worth at closing. Competent appraisers generally consider all market conditions and make the appraisal based upon what the market is doing. Thus, in a declining market, appraisals can come in at less than what the buyers agreed to pay. When the appraisal comes in low, most buyers walk away from the transaction to avoid overpaying. To circumvent this challenge, begin by advising buyers about what could happen. If they’re prepared for a low appraisal due to changing market conditions, they will be more willing to stay in the transaction.
6. Buyers with less than 20 percent down
Buyers who place less than 20 percent down face additional difficulties. They normally pay higher loan fees. They will also have to obtain private mortgage insurance (PMI), which protects 10 percent of the lender’s 90 percent loan. PMI normally costs the buyer an extra quarter-point. Borrowers also normally pay impounds for taxes and insurance. To avoid surprises, have your mortgage broker qualify the buyers at least 0.5 percent higher than the prevailing interest rates. This will cover the additional expense for PMI and impounds.
7. Seller or broker financing
If the appraisal comes in low, you may be able to save your transaction by asking the seller to carry a second trust deed for the difference. If possible, avoid showing properties where there is no equity. In dire cases where the seller lacks equity or is unable to carry any financing, the buyer may have to obtain a second trust deed from a third party. These loans often cost an additional 2 to 5 percentage points more than the cost of a first mortgage. When times are really bad, agents may have to carry their commissions as a second or third mortgage secured against the property.
Working in today’s new lending environment requires skill and preparation. Take the necessary steps to outline the current lending situation to your buyers and sellers before writing or presenting an offer. Prepare your sellers for the possibility of carrying the financing. Also, be sure to advise both buyers and sellers that the property may appraise lower than the contract price due to shifting mortgage conditions. Having these conversations ahead of time will help you to close more transactions, even when obtaining financing is a struggle.
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of “Waging War on Real Estate’s Discounters” and “Who’s the Best Person to Sell My House?” Both are available online. She can be reached at firstname.lastname@example.org or visit her blog at www.LuxuryClues.com.