Nonprime Mortgage Myths Debunked: Teach Realtors® & Builders to Prequalify Leads
By Steven Skolnik, Executive Vice President of Production, First Franklin Financial Corporation
REPRINTED FROM SCOTSMAN GUIDE RESIDENTIAL EDITION, OCTOBER 2004
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n the market’s volatile rate environment, purchase business, and Realtor® and builder relationships will be the most important sources of business for mortgage brokers. The Fed just raised rates, meaning that a lot of purchase loans are coming your way from consumers looking to get into the market before rates go even higher. In the coming deluge of purchase business, how do you streamline the loan process to figure out what type of loan scenario works for your borrowers? Nowhere is this more critical than in the nonprime market, where borrowers require special attention and flexibility to find loans that fit. Firsttime, self-employed, no-money-down and credit-challenged homebuyers have different needs. As a result of the many mortgage misconceptions that still linger in consumers’ minds, many of these potential borrowers may not realize that they can qualify for better, easier home loans. So, how do you debunk these mortgage myths and qualify more homebuyers for more home loans? It all starts with your customer network.
Establish partnerships with builders and Realtors® to help them understand the nonprime niche, and they will educate their homebuyers about how to qualify for better, easier home loan solutions. By identifying and then demonstrating how nonprime mortgage solutions debunk these myths, you’re teaching your Realtors® and/or builders how to help you sell more loans from your brokerage to more of their clients. To get your customers to help in building your business, consider these top five mortgage myths: ■ Myth #1: Borrowers must provide a down payment to purchase a home. As you well know, lots of people buy homes without a down payment. Many banks and mortgage lenders offer 100 percent financing—or even 103 percent financing—to reduce buyers’ out-of-pocket expenses to close the loan. If you consider that a standard 5 percent down payment on a $250,000 sales price is $12,500, you can understand how zero-down home loans are ideal for first-time and low-cash borrowers. Just because they don’t have a lot of cash reserves doesn’t mean that they can’t afford to own a home. Of course, there are closing costs associated with getting the mortgage loan that borrowers must consider, such as title fees, taxes, appraisal fees, recording fees, closing agent fees, insurance, etc. Often, borrowers are not aware of these costs, so it’s important that your Realtor® and builder partners explain them to
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their borrowers. Keep in mind that programs like 103 percent financing, in which borrowers can finance up to 3 percent of their closing costs, can drastically reduce their cash investment. Myth #2: If borrowers don’t put down 20 percent, they’ll have to pay mortgage insurance. Many nonprime lenders don’t require mortgage insurance for any of their loans. While these lenders factor the lack of mortgage insurance into the effective interest rate, it often works out better for borrowers because mortgage insurance isn’t taxdeductible, while interest paid on a loan can be tax-deductible. Take a look at this example: As you can see, the scenarios with mortgage insurance and without mortgage insurance work out to have the same effective interest rate. However, borrowers who don’t have to pay mortgage insurance could ultimately save more money because the additional mortgage interest they’re paying each month may be tax-deductible. Myth #3: If borrowers have blemishes on their credit record, they’ll never qualify for a loan. Bankruptcies, foreclosures and debt are par for the course in the nonprime lending world. Homebuyers with past credit problems are still eligible for a variety of loan programs. Borrowers with credit scores in the 540 to 700+ range will often qualify for more flexible mortgage options by choosing a nonprime loan. Nonprime lenders often offer
Nonprime Mortgage Myths Debunked: Teach Realtors® & Builders to Prequalify Leads
Scenario WITH Mortgage Insurance Percentage of loan amount to purchase price Loan amount Term (years) Interest rate Monthly principal & interest payments Monthly mortgage insurance cost Monthly mortgage insurance payment Total monthly payment1 Effective interest rate 95% (5% down) $150,000 30 6.50% $948.10 0.78% $97.50 $1,045.60 7.47% Scenario WITHOUT Mortgage Insurance 95% (5% down) $150,000 30 7.47% $1,045.60 $0 $0 $1,045.60 7.47%
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many of the same programs that most consumers believe are reserved for borrowers with perfect credit, such as zero-down programs (100 percent and 103 percent financing), bank statement programs (for selfemployed and nonsalaried borrowers), interest-only payment options and home equity lines of credit. Additional benefits to help borrowers qualify for homeownership, such as no seasoning on discharged bankruptcy and no verification of rent, are also available within some nonprime loan guidelines. Myth #4: Borrowers won’t qualify if they’re self-employed, work parttime or have a nonsalaried job. A lot of people worry that, if they don’t get a regular W-2 from an employer, they won’t have the income documentation required to qualify for a home loan. Many nonprime lenders offer simplified income verification alternatives that make it easy for self-employed, 1099, contract, commissioned,
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tipped and other borrowers with nonsalaried wages to skip the paperwork hassles. Part-time workers, who have additional unearned income, such as semiretirees with pensions and social security or divorced borrowers with alimony and child support income, also may believe they won’t qualify. Personal bank statement programs, which allow borrowers to use their bank deposits to show income, and specialized stated income programs, which may require seasoned liquid assets, are offered by many nonprime lenders and may allow borrowers to qualify for loan scenarios that are just as flexible and with equally low rates as those traditionally reserved for salaried borrowers. Myth #5: It’s more expensive to have a mortgage than to pay rent. Even without a down payment, borrowers’ monthly mortgage payments may not be as high as they think. For example, a $150,000 home loan
with 100 percent financing may only require monthly payments as low as $1,2512. On a $250,000 home loan, monthly mortgage payments could be as low as $2,0842. If this still remains too far out of reach for your borrowers, they can often reduce their monthly payments by choosing the interest-only feature offered by many nonprime lenders. The interest-only mortgage is gaining popularity—particularly in areas where property values are high and expected to appreciate—because it allows homebuyers to get larger loan amounts and still make lower monthly payments. In fact, since payments are lower with an interest-only loan, borrowers can qualify on a lower debt-to-income ratio and qualify for larger loan amounts based on what they can afford on a monthly basis. Some borrowers also worry that they can only pay interest, yet future monthly payments can also be reduced when principal payments are made during the interest-only period. In addition, borrowers often don’t realize the tax advantages of homeownership vs. renting. The interest on a home can be tax-deductible. Rent, on the other hand, is paid to the building owner and contributes no equity to a borrower’s financial situation. For example, if your borrowers had a $200,000 30-year fixed mortgage at 7 percent, they would be paying approximately $1,331 per month, which would amount to $15,967 at the end of the year. The difference between a $1,331 monthly rent and $1,331 monthly mortgage payment is that approximately $13,936 of that annual expense is potentially tax-deductible interest3.
Nonprime Mortgage Myths Debunked: Teach Realtors® & Builders to Prequalify Leads
Teach Your Realtors® & Builders to Do the Groundwork Educating your Realtor® and builder partners is one of the best things you can do for your business. By teaching them what questions they should ask, what types of loans are available and how to overcome buyers’ objections or misconceptions before they send their clients your way, you are going to save yourself a lot of time and effort. And, you’ll be their hero when you help them close that tough deal. The best way to effectively get your educational message out to your Realtor®/ builder network is by partnering with nonprime lenders. This ensures that you deliver the best understanding of what nonprime loans can do for their clients. Many nonprime lenders offer educational seminars about their products and services—nonprime product-related PowerPoint® presentations that brokers can customize and even consumer-direct educational and marketing materials that brokers or Realtors® can personalize. Be sure to choose a nonprime lender that offers the full suite of products and features, including products that require no mortgage insurance, no seasoning on bankruptcy, no verification of rent, high loan-to-value products, jumbo financing, flexible income verification requirements and mortgage program compatibility with a wide FICO spectrum. This way, you know you’ll be able to supply your Realtors’® clients with the most options. Make a plan. Talk with your preferred nonprime lenders to determine what kind of support they can provide. Some lenders employ full-service creative teams that produce materials even upon request from their broker partners. This means that you can have customized materials and presentations created for you that highlight your specific niches, service specialties and the mortgage products you represent. Once your Realtor®/builder partners learn about what you can provide to them and their clients, you’re well on your way to selling your services to their network of clients. This is also a great way to gain more qualified leads from your Realtors® and builders, to establish credibility with their clients and to fund more loans. A little education goes a long way.
Steven Skolnik, executive vice president of production for First Franklin Financial Corporation, oversees all wholesale and portfolio retention production for First Franklin, a leading national nonprime mortgage lender who has already funded $17.2 billion in nonprime originations in 2004 through July. Since joining the company in 1995, Mr. Skolnik was one of the key developers of First Franklin’s nonconforming division and its signature product, Direct Access, which contributed to the company’s transformation into a “top five” nationwide lender that specializes in nonprime lending. He has chaired the National MBA’s subprime lending committee for two terms and chaired the California Association of Mortgage Bankers E-origination Committee. Mr. Skolnik has also been a member of both the Capital Markets Committee and the Wholesale Committee for the National MBA. He can be contacted by e-mail at: Steve.Skolnik@ff.com. 1. The example cited is for illustrative purposes only and is not intended to advertise specific programs or rates. For current rate and program information, please contact your local mortgage broker. 2. Assumes a 600 FICO credit score. Monthly payments in this scenario include PITI, based on an 8.00% amortizing rate (effective 8/504) with a 30-year fixed term, 1.2% of the purchase price per year for taxes and insurance and no borrower down payment.
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3. The numbers included here are for illustrative purposes only and may vary based on your borrowers’ payment history, annual interest rate adjustments, etc. Consult your tax adviser regarding the deductibility of interest. ◆