This year, housing affordability has reached a record low.[i] Only 21% of homes for sale are considered “affordable,” meaning that their estimated monthly mortgage payments are less than 30% of the average residents’ income. That figure is down from 60% in 2021.[ii]
So, what’s the reason behind these costly market conditions? High interest rates and low housing inventories are two primary factors. Due to these obstacles, homeownership may feel out of reach for many Americans.
In this article, we’ll review eight strategies that mortgage lenders can use to help their borrowers overcome housing affordability hurdles and get them into their dream homes.
#1 Empower Borrowers With Home-Buying Education
Navigating the home-buying process can be overwhelming even in the best of market conditions. Today’s borrowers, in particular, can benefit from a little extra hand-holding from their mortgage lenders. You can support your borrowers by educating them on key topics along the way.
Here at Certified Credit, we’ve created several educational resources that mortgage lenders can share with their first-time borrowers, such as our:
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- First-Time Homebuyer Guide – This comprehensive guide reviews the steps involved in the home-buying process, as well as some common mistakes to avoid.
- Ultimate Cheat Sheet To Answer First-Time Homebuyers’ FAQs – This article answers 20 of homebuyers’ most frequently asked questions about credit scores, mortgage requirements, loan programs, the lending process, and more.
While you’re on the topic of credit education, you may have to reset certain applicants’ expectations about what they can afford, given their FICO score and financial situation. Homes that may have been affordable a few years ago may simply be out of reach in 2023.
#2 Review Borrowers’ Financial Situations
You can also help your borrowers make more strategic purchase decisions by discussing their financial options with them early on. For instance, you can talk to prospective borrowers about:
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- Their current financial situations
- Why they want to purchase a home now
- What their goals are regarding homeownership
Since these details can make a big difference in a borrower’s home search and lending journey, it’s a good idea to initiate these conversations before you even pull their credit.
You may also want to take a look at their financial statements. These statements can shed light on whether a borrower struggles with their spending or has large amounts of debt. Just like a low credit score, these facets of a borrower’s finances may make them ineligible for a mortgage with affordable rates and terms. Find out if there’s a story behind your borrowers’ subpar financial history and see if you can help them overcome it.
#3 Evaluate Borrowers’ Credit Scores and Highlight Ways to Improve Them
Borrowers’ credit scores directly impact the cost of their mortgages. By coaching your borrowers into higher credit scores, you can help them qualify for more affordable loans.
At Certified Credit, we offer the following tools to help you do just that:
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- Cascade Prequal – Offering prequalification can help you and your borrowers better understand their creditworthiness. Cascade Prequal automates the prequalification process, enabling you to offer it online with ease.
- Credit score improvement tools – If an applicant’s FICO score needs work, you can show them the fastest path toward improving it using our credit score improvement tools. Wayfinder and Credit Assure can generate customized score improvement plans, while the What-If Simulator can predict how long it will take for your applicants’ to achieve their desired score improvement. Using these tools, you can show your borrowers what possibilities await them if they commit to 30, 60, or 90 days of dedicated score improvement.
- Rapid Rescore – Since homes are selling so quickly, some borrowers may want to submit an offer before all of their credit score improvement has reached their credit reports. Rapid Rescore can recalculate borrowers’ credit scores to include recent data and resolved disputes. By using Rapid Rescore, you can help your eager homebuyers secure the best possible rates and terms.
#4 Review Their Down Payment Options
According to a Bankrate survey,[iii] 36% of non-homeowners said that they don’t think they can afford a down payment on a home. Fortunately, many programs can ease this affordability issue, including:
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- Low down payment programs for first-time homebuyers – First-time homebuyers can qualify for down payments between 0% and 3.5%, depending on the loan program they choose.
- Down payment assistance programs (DPAs) – In addition to enjoying low down payments, some borrowers may also qualify for DPA in the form of grants, forgivable loans, and low-interest loans.
Many borrowers don’t know about these programs. By educating your borrowers about them, you can rectify their awareness of what’s possible.
#5 Touch Base With Your Borrowers When Rates Shift
Interest rates have been quite volatile in recent years. They jumped from a historic low of 2.65% in 2021[iv] to 6.87% today.[v] As interest rates change, so do borrowers’ monthly mortgage payments. In turn, fluctuating rates can alter the types of homes borrowers can afford.
With this in mind, it’s important to touch base with your borrowers any time rates change and update them on their home-buying options. You can show them how the new interest rates will affect their mortgage loans’ principal, monthly payments, and total interest.
For example, if interest rates increase from 5% to 7%, a borrower may only be able to afford a $300,000 mortgage instead of a $380,000 mortgage. The total interest owed on these 30-year loans would jump from $354,372 to $418,527, costing the borrower around $64,155 more. Being transparent about these developments can help you earn your borrowers’ trust and improve their market awareness.
#6 Explain the Impact of Loan-Level Pricing Adjustments (LLPAs)
LLPAs are fees that apply to conventional mortgages. These fees can alter the price of a loan by increasing its mortgage rate. Like auto insurance premiums, LLPAs are assessed based on a borrower’s risk. The factors used to evaluate a borrower’s risk are as follows:
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- Credit score
- Loan-to-value ratio
- Debt-to-income ratio
- Loan purpose
- Occupancy status
- Mortgage type
This year, the Federal Housing Finance Agency (FHFA) updated the LLPA matrix to improve housing affordability. LLPAs for borrowers with low credit scores and low down payments have been reduced, while LLPAs for homebuyers with good credit have increased slightly.[vi]
If a borrower’s LLPAs are unavoidably high, you may want to suggest that they apply for a government-backed mortgage instead. After all, LLPAs don’t apply to FHA, VA, USDA, or HUD Section 184 mortgages.
#7 Walk Borrowers Through Renting vs. Buying
Some aspiring homebuyers may think that renting is a better move until the market improves. While purchasing a home can be expensive, so can continuing to rent. You can help your borrowers make an informed decision about buying vs. renting by running the numbers for them.
You can also use the price-to-rent ratio, which multiplies a rental home’s monthly rent amount by 12. After that, simply divide the price of a similar property for sale in that area by the annual rent figure. If the resulting ratio is over 20, renting is the more affordable option. If it’s less than 20, buying a home may be a better move.
Here are some other factors to bring up in the renting vs. buying conversation:
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- Borrower’s current financial situation – If a borrower’s income, down payment, credit score, or debt is insufficient to secure an affordable mortgage, they may be better off renting until they improve these factors.
- Intended time in their purchased home – Buying a home comes with several upfront costs, from loan origination fees to title insurance. Fortunately, these expenses can be offset by the increase in equity that arises from a home’s appreciation over time. In order to obtain more equity, homeowners must stay in their homes long enough for them to rise in value. Depending on the housing market, this could take several years.
- Capital gains tax exemption – Most investments have sizable capital gains taxes on the other side. However, homes are unique in that sellers are exempt from capital gains if they’ve owned the property for a minimum of two years.[vii] In this sense, buying a home is a uniquely profitable investment.
- Rising housing costs – Home prices tend to rise over time. Thus, putting off a home purchase for a few years may cause some borrowers to miss out on the lowest prices they’ll ever have access to.
- A structured savings plan – Unlike rent payments, mortgage payments help homeowners build equity. Homeowners can tap into this equity in the future through cash-out refinancing or selling their homes. In this sense, mortgage payments can help homeowners grow their savings in a structured way.
- Laying down roots – While buying a home can be a savvy investment, its benefits go far beyond the financial. Owning a home can bring a sense of stability into people’s lives and help them feel more invested in their communities.
You can also remind your borrowers that they can always refinance their loans when interest rates drop in the future—they don’t have to stay locked into an elevated rate. By refinancing to a lower interest rate, borrowers can make an already sound financial decision that much more affordable.
#8 Help Borrowers Evaluate Various Home Types and Locations
While realtors are typically tasked with the job of presenting potential properties, you can have a hand in this process as well. Some locations and property types are more affordable than others.
This year, many borrowers are willing to move for more affordable housing options. Bankrate found that 27% of Americans would consider moving out of state, while 20% would move farther away from their family and friends.
You can have a meeting with your borrowers who are open to moving and help them review the cost of homeownership in various areas. You can also help them assess nearby comps to ensure that their chosen home’s appraisal is free of bias.
Grow Your Mortgage Lending Business With Certified Credit
Here at Certified Credit, our mission is to help mortgage lenders thrive, no matter the market conditions. Right now, borrower education is one of the most powerful tools at mortgage lenders’ disposal.
By guiding your borrowers through the home-buying process and educating them on all of their options, you can help them secure an affordable mortgage and win over their enduring loyalty.
In addition to our credit score improvement tools, our suite of products and services includes:
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- Affordable credit reports
- Automated lead generation and borrower retention tools
- Automated prequalification
- Automated verification of income and employment
- Automated undisclosed debt monitoring
- Flood zone determinations
- Fraud and risk support
- Settlement services
Looking for more ways to grow your mortgage lending business in 2023? Schedule a credit consultation with us today!
How Can You Qualify More Borrowers in Today’s Market?
The secret lies in discovering effective strategies that not only increase your pool of qualified borrowers but also reduce origination costs. Check out our “Unlocking New Opportunities:
Your Guide to Qualifying More Borrowers in Today’s Mortgage Market” to learn how you can integrate innovative approaches to streamline the qualification process, empower borrowers with a deep understanding of their credit and financial standing, and enhance your qualification workflow for improved operational efficiency and cost savings.
Sources:
[i] CBS News. Vast majority of U.S. homes are unaffordable to the average buyer.
https://www.cbsnews.com/news/affordable-home-housing-us-redfin-report/
[ii] Redfin. There Were Half as Many Affordable Homes for Sale in 2022 as There Were in 2021.
https://www.redfin.com/news/share-of-homes-affordable-2022/
[iii] Bankrate. 73% of aspiring homeowners cite affordability as their primary obstacle.
https://www.bankrate.com/mortgages/homeownership-remains-centerpiece-of-american-dream/
[iv] MPA. Historical Mortgage Rates in the USA: Highest High and Lowest Lows.
[v] Bankrate. Compare current mortgage rates for today.
https://www.bankrate.com/mortgages/mortgage-rates/
[vi] The Mortgage Reports. Loan-Level Pricing Adjustments (LLPA): A Complete Guide For Mortgage Borrowers.
https://themortgagereports.com/6866/llpa-loan-level-pricing-adjustment-mortgage-rate
[vii] Investopedia. Capital Gains Tax on Home Sales.
https://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp
