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Thanks to government regulations and the rules governing mortgage giants Fannie Mae and Freddie Mac, there hasn’t been a ton of innovation in residential mortgage lending over the years — and precious little of it has benefited consumers.
That’s changing, with a wave of startups providing alternatives to mortgages that make it easier for renters to become buyers and existing homeowners to trade up or down in challenging market conditions.
These mortgage alternatives are helping real estate agents expand the pool of potential buyers, get more offers accepted, and keep deals from falling apart before they reach the closing table.
“This is another profound transformation in the way the transaction is being done, and it’s not going away,” Inman editor-at-large Clelia Peters said during a Connect Now panel discussion with the founders and CEOs of two leaders in the field, Divvy Homes and HomeLight.
Divvy Homes offers a new take on rent-to-own, that lets agents refer would-be homebuyers to the company to fill out an application that founder and CEO Adena Hefets said is about 10 times easier to complete than a mortgage application. Divvy gives agents’ clients a budget to shop with. When they find a home they like, the company will make a cash offer on their behalf.
Divvy pays the agent’s full commission. To move in, the client commits to put up an ownership stake equal to 1 percent to 2 percent of the home’s value. They then build up an ownership stake of 5 to 10 percent over the next 3 years, with the right to buy the house from Divvy any time before that if they can qualify for a mortgage.
“It’s a really nice way to take a consumer … and allow them to become as powerful as an institutional buyer,” Hefets said.
Currently available in 16 markets — Atlanta, Cincinnati, Cleveland, Dallas, Denver, Fort Lauderdale, Houston, Jacksonville, Memphis, Miami, Minneapolis, Orlando, Phoenix, San Antonio, St. Louis, and Tampa — Hefets said Divvy can serve would-be homebuyers whose credit isn’t good enough to qualify for a mortgage or down payment assistance.
“The way that I think about these tools are, let’s say in your market, 20 percent of the population could get a mortgage, and everyone else was going to be renters,” Hefets said. “You can now take 40 percent or 60 percent of the population and turn them into homebuyers … so that’s really the goal, is take more consumers and turn them into homebuyers.”
Available in California, Colorado, Florida and Texas, HomeLight Cash Offer lets homebuyers purchase a home using HomeLight’s funds, closing in as little as 7 days. Buyers pay a fee of 1 percent if they also get their mortgage through HomeLight Home Loans (the fee is 1.5 percent in Florida). If they don’t get their mortgage through HomeLight, the fee is 3 percent.
HomeLight founder and CEO Drew Uher said there’s also a free, 21-day closing option, where HomeLight doesn’t take possession of the home. Instead, acting as both the mortgage lender and title and escrow company, HomeLight “backstops the entire [transaction] with HomeLight’s balance sheet.”
“We fully underwrite a borrower while they’re shopping for a loan, rather than when they’re in escrow,” Uher said. “We think it’s crazy that in 2021, mortgage companies are still waiting to underwrite borrowers until they’re actually in contract. That is what causes a lot of transactions to blow up, and it’s what creates the uncertainty in these transactions.”
HomeLight Trade-In helps existing homeowners trade up or down, working with the seller’s real estate agent to make an offer on their existing home, and to finance the purchase of their next home with a contingency-free offer.
In California and Colorado, HomeLight charges a 1.5 percent fee to purchase, own and sell the client’s existing home if they also use HomeLight Home Loans to finance their purchase (the fee is 2 percent in Texas). If the seller uses another lender to purchase their next home, the fee is 3.5 percent in California and Colorado, and 4 percent in Texas.
However, if HomeLight is able to sell the house for more than it paid, the seller gets the additional profit, minus selling costs and
“We give all of that profit back to the consumer,” Uher said. “They don’t have to worry about an iBuyer taking advantage of them, and taking the profit on the sale of their home.”
In previous installments of her three-part Connect Now series on disruptions in real estate finance, Peters examined transaction facilitators like Ribbon and Homeward, and new tools for tapping home equity such as Point and EasyKnock.
In wrapping up the series, Peters urged agents to seek out those and other innovative companies, and learn how their products work.
“These types of tools are only going to get deeper and deeper into the transaction,” Peters said. “Right now, I think there’s an enormous opportunity to be an early mover in your markets, where these tools are available, and to use them in a way that provides you with an advantage, that very few other people in your market have.”
Uher said that, with the “entire mortgage industry” aligned around qualification standards governing Fannie Mae and Freddie Mac, the stage has been set for “great companies like Divvy and HomeLight” to solve homebuyers’ problems and help them achieve better outcomes.
“As we think about the future, we think the vast bulk of transactions in the U.S. will be facilitated by some sort of proptech mechanic,” Uher said. “We think that eventually, 80 percent plus of the housing market will adopt these mechanics, which is really exciting for us and other companies in the space.”
“I think the way to break down the market is, you now have a bigger “TAM,” or total addressable market, to go after because of these products,” Hefets said. “The first thing you should look at is, ‘Can my customer get a mortgage or not?’ If they can’t, you now have products you can send them to in order to still be a homebuyer. If they can, you might want to ask yourself, ‘OK, are they winning the bids that they’re putting down on homes, or are we just consistently losing, which is why they’re still shopping with me?’ And if the answer is they’re consistently losing because they’re coming in with financing contingencies, there are products to help solve that.”