It seems like we have been hearing about rising interest rates and the importance of moving away from refinances toward more purchase business for years now. Well, the time is finally
upon us, which means mortgage originators must
begin to look at opportunities that help them work
with referral partners — primarily builders and
Realtors — along with products that will help differentiate them from their competitors.
Making these changes can be somewhat challenging for originators who only typically offer vanilla
conventional, Federal Housing Administration (FHA)
or Veterans Affairs (VA) loans. Originators who are
going to thrive in this environment are the ones that
think outside the box and whose minds are open to
more creative products.
This change also will require a greater understanding of how to sell these other loan “flavors” to referral
partners by helping them understand the benefits to
themselves and their buyers. Let’s take a look at a couple of loan programs that can help originators increase
their competitive edge.
The 2/1 buydown
The first program is a new product to the market
place — the 2/1 buydown. This program can be hard
to find, but is in great demand by homebuilders. The
2/1 buydown can be used on both FHA and VA loans,
and is available for purchasing existing homes as
well as new homes.
The 2/1 buydown program helps with the “sticker
shock” of rising interest rates. Let’s face it, borrowers
have become spoiled when it comes to interest rates.
They don’t remember the days of 17. 5 percent interest
for a 30-year fixed mortgage — or even when those
rates eventually dropped back below 10 percent.
Today’s homebuyers are used to rates in the 3 percent
and low 4 percent range. As rates inch back up toward
5 percent, the 2/1 buydown allows borrowers to get a
fixed-rate loan with a starting rate back down in the
3 percent (or lower) range.
Here is how it works: Assume an originator can
secure a loan for a borrower at 4. 99 percent on a
30-year fixed rate. The borrower can buy down the
interest rate to 2.99 percent for the first year, or
2 percent below the original rate. In the second year,
low the original rate. Every year after those first two,
the rate remains fixed at the original 4. 99 percent.
This program lowers borrowers’ payments significantly over the first two years, giving them additional cash flow to buy appliances, put in a fence or
add window coverings, new furniture, etc. With lower
payments for two years, the acquisition of such essential lifestyle additions doesn’t pose a hardship, which
produces happier borrowers and less risk of default.
Remember, many borrowers — especially first-time
homebuyers — are somewhat maxed out on their
debt-to-income ratio (DTI) when they secure a home
loan. When those homeowners go out and charge
up their credit cards to buy new home additions,
that already high DTI can escalate into a scary range.
With the 2/1 program, this doesn’t occur because you
reduce the initial mortgage payment dramatically.
The advantages to homebuilders are substantial.
First of all, foreclosures in their developments are not
good for business and certainly not good for prop-
erty values and appraisals. Second, it gives build-
ers an additional tool for their marketing. They can
advertise a first-year rate that is extremely appeal-
ing. Third, the cost to the homebuilder runs around
Stuart Blend is regional sales manager for Planet Home
Lending, the correspondent division of a multibillion-dollar
private-equity fund with industry-leading pricing and products. Coming from a background of retail sales and running
midsize retail organizations, Blend has focused his attention
on assisting customers with growing their business through
innovative products and knowledge of how to sell these
products to referral partners. Reach him at
email@example.com or (469) 939-9055.
Grow Your Purchase Business
Take the sting out of rising rates with two loan programs
By Stuart Blend
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