ARM vs. FIXED?? IT MAY DEPEND ON THE REAL ESTATE MARKET
We love Loan Officers and Mortgage Lenders. They do wonderful things for our buyers. They arrange for the loan of LOTS and LOTS of money.
If you're monitoring the Carnival of Content - Loan Officers/Mortgage Lenders managed by Rich Jacobson, you've probably read a number of articles by some of the "best of the best" ActiveRain loan officers and mortgage lenders. I certainly have. In fact, I looked forward to this part of the Carnival of Content as eagerly as I did the first round which was for real estate practitioners. I'm learning from all of the contest submissions.
REAL ESTATE AGENTS CAN'T WORK IN THE DARK The subject of the contest was "ARM vs. Fixed Rate Mortgage Loans" and I am always eager to gain insight into the mortgage side of our business. Having a basic knowledge of home financing is important for real estate agents when counseling home buyers, which many agents do on a daily basis. I don't play loan officer and I'm quick to call or e-mail a loan officer when the need arises. However, my Internet advertising generates a lot of phone calls from home buyers and, if the conversation gets to the matter of financing, I need to know the basics. In years past, the ARM was always the recommended choice because of the buying power it gives our buyers. It makes little sense to pay for long terms when a family is only going to be in a home for 3-4 years. I know the buyer's father told them to get a "safe" 30 years fixed, but it would cost them a tremendous amount of interest over the years. My market area is VERY transient and the average loan is paid off in about 2/1 2 hears. So, I need to be able to qualify folks for long AND short term loans.
Loan officers tell me, "Lenn, Call me and I'll qualify the buyers for you". Well, that doesn't work because the buyer is on the phone and I need to decide whether to send the prospective buyer to an agent to look for a home NOW. If a buyer calls about a specific home or community, I like to verify that they are qualified for a home in that price range. Agents shouldn't be showing homes to prospective buyers who are not qualified for that price range. The qualifying procedure that I use is easy. I use the monthly gross income to figure about 30% of their income at 7% (this week), factor in taxes, hazard, HOA or condo fees, insurance for the county in which the buyers is interested and sometimes, figure an estimated interest tax deduction. The interest tax deduction is still a major incentive for home buyers in buy vs. rent comparisons. Jason Price points out the importance of the term of the loan. How long do they think they will own this home? We have military buyers in our area for whom it makes little sense for them to buy.
By the time I qualify a buyer, I have not only determined their qualifying price range, but have also gained their confidence and we are on our way to selling that buyer a home. So, the matter of "ARM vs. Fixed Rate" is a matter of great interest to me when speaking with home buyers. As Matthew Blum points out, there are over 100 loan programs available to every borrower from any loan officer. As a real estate broker working with home buyers, I don't need to know the intricacies of 100 loan programs. I do, however, often need to be able to qualify home buyers to determine whether they have sufficient income to even be in the market.
SHOULD BUYERS BE LOOKING AT THIS? OR SHOULD THEY TRY TO BUY THIS?
THE MEDIA WILL ALWAYS FOCUS ON THE BAD NEWS One of the reasons there is so much media attention to loan instruments these days is the problems associated with the sub-prime market. Along with the attention to sub-prime loans came a focus on option arms, teaser rates, etc. The dramatic increase in the number of real estate licensees, 1,300,000 members of the National Association of Realtors was matched by a concomitant number of mortgage brokers and loan officers.
LICENSE LAW GIVES THE CONSUMER THE RIGHT TO SELECT THEIR MORTGAGE COMPANY If a consumer contacts us and does not already have a relationship with a loan officer, we refer them to loan officers that we have had good success in closing on time with fair rates and who communicate with the buyer and agent. That's how we get to the settlement table. However, with the Internet, that has changed. Often, buyers already have a relationship with a loan officer, mortgage company or broker before they contact us. We can't interfere with that relationship without being accused of benefiting from a lender referral. I don't benefit from a lender referral except to get the job done for my buyer. But, buyers don't always know that and we have to walk softly when meeting new buyers until we have their trust and confidence and then, if we know our business, can advise buyers about different loan officers. Agents risk losing the confidence of buyers if the agent insists that the buyer, already "pre-approved", switch lenders. We have had loan officers "suggest" that the agent is going to benefit if the buyer changes to a suggested mortgage company. That can be true if the agent is with a real estate company that also owns a mortgage company. But, the suspicion that the agent is benefiting from a mortgage officer referral, while there may be no truth to the accusation, is always a risk. Sometimes agents don't have the opportunity to refer a buyer to a known and trusted loan officer until the buyer has had a loan denied by the mortgage company they selected before meeting the agent.
THEY QUOTED THE BEST RATE, BUT WILL THE CONTRACT CLOSE? The consumer wants to interview real estate agents about how long we've been in business, now many homes we sell, etc., etc. The consumer is looking for experienced real estate agents. But, most consumers assume that loan officers are qualified, are knowledgeable and are experienced. When the consumer seeks the services of a mortgage company, they usually have one question, "What are your rates?". Or, "What am I qualified to buy?". What's missing here? Are all mortgage loan officers experienced? Do they all know their business? Do they always close on time?
I spoke with an agent last evening who had to cancel a closing for Monday because the loan broker that the consumer insisted on using because he gave her a good rate, now can't close unless the buyer comes up with $6,000 more closing money by Monday. They won't return the agent's phone calls and, in fact, have refused to speak with the agent from the beginning. The agent knew that the loan quoted for that buyer was not a fair rate, never could get a GFE, and yet, the buyer insisted on sticking with the mortgage company. Unfortunately, the loan officer turned out to be, in the words of Brian Brady, a mortgage hack. Everyone did their job but the mortgage lender.
THE NEWS WASN'T ALL BAD I believe that we need to understand the relationship between mortgage types and the real estate market. I don't believe that mortgage loans operate in a vacuum. While the real estate market is quite sensitive to mortgage rates, mortgage loan types are also sensitive to real estate prices. When rates go down and more buyers qualify to buy, the inventory of homes for sale goes down and real estate prices go up. This occurred following the September 11, 2001 attack on the World Trade Center. I believe that the Federal Reserve dramatically reduced rates to help Wall Street and the banking system and businesses, but it also benefited many home buyers. Lower interest rates, once they filtered down to mortgage rates, made homes available to buyers that previously would have been considered out of their price range.
Rent vs. Buy? For most home buyers, the solution to high home prices is not "rent vs. buy", it could also be "buy a lower price home". Bryan Brady explains the importance of liquidity. If the home buyer has little liquidity, can only qualify for the McMansion with an exotic loan, or an arm with a higher margin, perhaps the solution is another home type or another community. Perhaps the solution is to consider buying a lower priced home. Perhaps a town home is a better solution. Perhaps a resale rather than new will work better. Perhaps new, when the builder incentives are factored in is a better selection in certain markets than resales. Perhaps they can travel a bit farther from work and get to a more rural area where prices are lower. Real estate agents who know their market can find better solutions to the high price of real estate than renting. With home ownership, the buyer will have the mortgage interest tax deduction, be able to leverage their investment and, the one thing they can't get renting, a place to call MY HOME.
43 Comments on ARM vs. FIXED FROM THE PERSPECTIVE OF A REAL ESTATE AGENT
JUL
28
2007
good points...
and I agree with Brian about the hacks...
but the one thing I will say is that you DO benefit from your relationships with your trusted mortgage partners...
you do receive benefits from their diligence, honesty and integrity
your benefits are:
Your service is better
your clients are happier
your referrals grow
and your commission is protected...
What do I mean by protected commission....well you showed an example of how a loan officer can foul up a deal... he didn't protect YOUR commission... but your mortgage partner will do everything in his/her power to create a positive and timely transaction environment so that everyone leaves happy... and paid.
Lenn, I appreciate what you have written, some lenders do the bait and switch. If they won't talk to use, as the Realtor of the Buyer Agent it is a red flag. No GFE?? Isn't that required by law ?
We send out 3 lenders that we work with to our buyers, even if they are prequalified and we let them know we are not getting anything out of the referral except know they will get Great Customer Service. I have NEVER had a loan not close, ON TIME, when they work with one of our 3.
Granted some still stick with their internet lender or bank and that is fine, but they never go as smooth.
Good job in summarizing Brian, Jason and Matt's post. I learned something from each of them.
David. I agree 100%. I am not happy when a buyer comes to us if they already have a relationship with a lender. The sales that fall apart with the agents I know are buyers who insist on using their own lender, almost always found from a TV ad. The loan officers we know settle their loans.
Missy. I agree. The local lender I use is with Chase and in 15 years, we've never had a loan not close. We had one sub-prime that he brokered out that was tough, but it settled. I have also had good results from Active Rain loan officers. None have settled yet, but they will.
Susan. Thanks. I get updates regularly from lenders. Helps. I don't actually sell much lately, I refer buyers out so I'm not that involved in the loan process, but the agents I trained still use the same lenders and they always settle, on time and smoothly.
Lenn, working with trusted people helps everyone succeed! Sometimes clients do not understand that we are referring these people because we know that we can trust them and not that we are not getting kick backs from it. I can say it, I can preach it, but I think the misconception sometimes is that we are referring for the monetary reasons. When the reality is to make sure it happens for everyone!
I had a back on the market this week from an out of town lender, my listing, ouch, ouch, ouch. I believe from what I have heard from the buyers agent it was bait and switch.
Do you after qualifying the buyers refer them to an agent who gets them to a lender to be pre-approved? I have got out of the habit of qualifying buyers myself in the last few years. I try to get the buyer to call the lender before we start looking at homes. Some are real good about it. Others are not but with the price of gas, I don't want to be running around with unqualified buyers. Nor do I think it is fair to sellers.
Great points and well written. It is too bad that there are so many "mortgage hacks" out there. Actually, it is too bad that there are so many consumers that are so caught up in the interest rate game that they sacrifice experience, knowledge and professionalism for an 1/8% difference in the interest rate. Have a great weekend.
Thanks Kim. I agree. For me, I can deal with just about any loan officer. But, agents with less experience don't always. One of my former agents antangonized more than one buyer by trying to get the buy to change loan companies when she first met them. She just didn't know hot to do it. Thanks for the "rating", I hope.
Maureen. Thanks for commenting. I don't have any hard rules about how to handle the qualifying matter. Each caller is different. If I have a "hint" that the buyer may have credit issues, I have a lender contact them. But, I can quickly qualify to make sure they're in the right price range. If I haven't done it when I make the referral to an agent, I "hope" the agent does. Unfortunately, they tend to loan on the lenders a bit too much for this. I qualify so fast, it's not a problem. I like to refer buyers I know are qualified.
Dave. Thanks for dropping by. There are unfortunately, a lot of "mortgage hacks" and "real estate agent hacks".
I had a Buyer recently who were very pro-active and had lined up Two Lenders and pre-approvals. I was not happy with either(a dot-com and one I had had bad dealings with) I waited till They knew me better and asked them if they minded"talking" to someone I knew did a great job. I explained that communication between all parties(especially towards the end) was vital and we needed someone we could reach. They agreed...and as luck would have it the first time they tried to get something important from the dot-com ...no call back. They ended up with my lender and were very happy.
I always make sure that a buyer is pre-qualified by a mortgage consultant before we view properties, because even though I know how to pre-qualify, it's tough to do it today when you don't know what their credit score is. A buyer's score is critical in today's market.
There are loans a buyer could have gotten 2 months ago, but with the tighening of the mortgage market, the buyer wouldn't qualify for them today.
There are just too many details involved with getting a mortgage today, so I have the buyer contact a reliable mortgage consultant, who will go over their various options and help them determine which loan program is best for their situation.
Lenn - This may seem a little adventurous, but I will occasionally recommend a financially/analytically oriented Realtor to try loan officering for a year or two, part-time. I did it for three years in the mid-90's and have benefited significantly ever since. (Thanks for the idea for my nest post! Send me your bill....) I have a list of five loan officers, all with 15+ years experience, all with competitive products, all return calls, all have good to great interpersonal skills and none have let me down. It takes time and effort to build your team of go-to lenders, but the effort will pay unending results.
Joan. Convincing a buyer hooked up with a less than helpful lender is something we will run into more and more. The TV ads alone are almost enought to make a jaded old goat like me want to call them. They're all over the radio too.
The goal is for the buyer to have the relationship with the lender FIRST before meeting agents. The first entity that gets the buyer's trust is the one that is more firmly in control. I've had agents that just could not help a buyer in these cases. I don't have that problem because I know how to handle these things, but it takes a LOT of experience.
Bryant. Thanks for stopping by. This contest is shaping up to be very exciting.
Dan. Requiring pre-qualification of buyers before touring in this area will simply send buyers to other agents. We qualify for a range and it works. Once the buyers know us, we can get a credit report/score with a reliable lender. It works.
Dave. I look forward to your next post. I spend many years learning about the mortgage side enough to be able to do a good job for our buyers. I've been attending loan applications for many years. I don't send folks to lenders, I take them. Of course, things are a bit different now with the Internet and buyers and agents all over two states. But, I learned how to help my buyers from scratch. I talk with agent all the time who don't do buyer estimated closing costs. WHAT??? How can you write a contract without knowing the buyers' finances.
My God! Lenn Harley won the lending carnival, also.
Let me explain to everyone why this is a pivotal post of extreme importance. Lenn is listening and providing feedback. The secret to a successful relationship between Realtor and Loan originator comes from their ability to mirror each other. Communication is paramount but unconscious competence comes when each party teaches the other about their profession.
One Realtor, with whom I do business, hammered the importance of reading contracts. I used to know more about the Arizona contract than most agents. When I moved to California, I neglected that duty. The aformentioned Realtor was adamant about contract expertise, so much that I took home the CAR contract and read it 8-10 times. I have it, filled with notes and questions that were answered by this Realtor. This Realtor knows my equity management, liquidity, and total costs philosophy better than most loan originators. the result?
Unconscious competence. We act as if...the other party were always in the room. Clients get a seamless presentation with no conflicting views. Transactions just...happen.
It is so important that we, as symbiotic professionals learn more about each other's discipline. Loan originators who know how to spot a potential question for the Realtor, Realtor's that explain the importance of financing issues, will attract more clients, get more referrals, and perform best practices for a long time.
Congratulations on the Carnival of Lending win, Lenn.
Brian. That's funny. But, I agree that loan officers and agents need to work as a team. I believe that the more agents understand about the loan process, the better we can represent our buyer/cliens and seller/client's interests.
You probably know the CAR contract of sale better than the average agent.
The agent who called me yesterday who had to cancel a closing for Monday because the load fell apart at Friday, asked what would happen with her buyer's earnest money. I asked her four times what does the contract say will happen if the buyer doesn't close. Loan commitment was due last week. She called without the contract in front of her. I don't talk about contracts without it in front of me. What happens in a contract isn't what Lenn says. It's what the buyer and seller have agreed in the contract. That agent was with me 8 years and never learned to read the contract.
Which, of course, is one reason why I no longer have any agents.
Often I find that the Realtors referrals to their trusted loan officer or mortgage lender --- well, they are simply not getting the best deal. But, if the Realtor steers them in their preferred direction, there is little that I can do to earn their business, despite being in the position to earn their business.
Realtors: Simply getting the deal done does not really mean that your client is getting the best deal.
I just ran into this, with a first time home buyer, in that my funds to close were LOWER, and my RATE and APR, all lower, and based upon a real pre qualification, and findings and obtaining pricing --- all with a written pre qualification and a solid good faith estimate that I would stand by.
So, most educated mortgage professionals, who care, and who do great work, and close deals, are some you do, and some you don't know.
You know what Lenn, this is one of the best posts ever. It brings to mind the phrase 'don't throw out the baby with the bathwater.' Much less elegant than what you have written. I count on my mortgage lenders to help all of us help homeowners buy a home, and we all need to keep things in proper perspective.
I agree with you, I also stopped trying to qualify buyers myself years ago. I rely on a loan officer from FNMC that I have used for the past 10 years. He has never failed me and my clients always love him and everyone on his team. An example of his dedication and communication - He updates me every week by email with stuff I CAN UNDERSTAND. Below is the email I got from him today:
Everyone,
Most of the news this week was more of the same. Fears of mortgage defaults triggered substantial losses in the stock market (over 300 point drop just yesterday) and more tightening by lenders on products and rates. How this will affect our businesses is that there will be more limitations on 2nd mortgages (80/15/5 need much better credit and 80/20 will have to be switched to mortgage insurance products). As realtors, be more cautious of 100% financing and stated income buyers as these products are changing daily.
The trend in the industry is back to the basics in lending. You may need some money to buy a house (who would have thought) and good credit is going to be required for lesser down payment programs. Stated income loans and No-Doc loans will become much more strict as well. In lower price ranges you will start to see things we haven't seen in years. Realtors best friends, FHA and VA loans, will be making a comeback as more of these Conventional 100% loans go away ( Don't worry as much... they have changed these programs to become more realtor friendly). Feel free to call me if you need a refresher course on these loans.
As always, these changes shake out and buyers will still buy homes. Just stay updated to protect your clients and the importance of working with a reputable, knowledgeable loan officer is crucial in this market. Please let me know if you know one (ha-ha).
Chad Loube Vice President / Branch Manager National City Mortgage, a division of National City Bank 15400 Calhoun Drive , #100 Rockville, MD 20855 Office: 301-279-4665 Cell: 301-452-7399 Fax: 301-309-0240 Email: Chad.Loube@NCMC.com Website: www.ChadMortgage.com
Michael. I have several trusted lenders to whom I refer buyers. But, these lenders didn't recommend themselves to me. I meet new lender through buyers who came to me already pre-approved with these lenders.
If a buyer needs a lender referral, I have several I can call upon.
I also get about 3-4 calls a week from lenders who want our business. I also get package in the mail from lenders who want our business. I don't send anyone to a lender without first going from loan application to settlement with them.
Carole. It is, as Brian Brady says, a symbiotic relationship and a very important one.
Debbie. Thanks for stopping by. I really like to qualify myself. I am, as we all know, a true control freak.
Lenn, Lenn, Lenn.....so winning the last round wasn't enough for you, huh? So what's next? A post on Staging?....great article, Lenn. Brian is so right in his observation. We owe it to our clients to have a good working knowledge of all aspects of our profession.
I am glad that Realtors, attorneys, and loan officers are finding professional, dependable contacts from this site. I know it is hard to find reliable, trustworthy professionals in all of these categories, but it is refreshing to hear that some of us still have our sanity!
Thank you all for being exceptional individuals in your field:)
Lenn.... I found Rich Jacobson's comment somewhat comical. But seriously, you make some excellent points. It's not about the lowest rate, but the knowledge and expertise that one should have as a loan officer.
Overall, great overview from a realtor's perspective. Great job....
Lenn - I can agree that sometimes you do need to prequalify a client on the spot before getting a chance to speak to a Loan Officer. But it's not as easy as you put it with your example of using 30% income, 7%, taxes, hazard, HOA, etc. A credit check is VERY IMPORTANT. This is because it will uncover their monthly minimum payments they have due each month from their debts, which affects their Debt-to-Income ratio(buying power) - so even if they make a 6 figure income, it doesn't matter when they also have a lot of debt they may have failed to disclose to you!. Also, any late payments, delinquencies, BK's etc affect what rate you can qualify them for. Liens that show up on the report can also be a deal breaker. It's worth the time to wait for your LO to prequalify them so you don't spin your wheels!
Thank you for acknowledging that it takes a lot more than a low advertised interest rate to prove you are the right Lender for the job! It's the service and experience they should be more concerned about.
Pete. You assume that a large percentage of folks who contact us about homes for sale have credit problems. They do not. The vast majority of buyers that contact me through my Interent presence are credit worthy and ready to tour homes.
It's not a matter of credit worthiness, they are credit worthy. My goal is to bond with them as their agent. The few who eventually are disqualified due to credit problems are so rare, they aren't worth mentioning.
Show me an agent that insists on a credit review before putting a buyer in their car and I'll show you an agent with few buyer clients.
Jeff. I found that the articles in the lender's content were rather myopic in terms of the over all home buying experience. Folks do need an agent too. A loan without a house to buy or an agent to help get a contract isn't going to do anyone a lot of good. Thanks for commenting.
Sally. Thanks for visiting. Lenders sometimes forget that a house is necessary for anyone to even need a loan.
Shelly. Thanks for commenting. You're right. Dave had a good handle on what we do.
Fred. Thanks for visiting. You're welcome to the stuff.
Lenn, This is a fantastic post. I think it is great that you do the basics just to make sure before you even pass the people on they can really buy. Everyone win when you do the basics like this.
Matthew. Thanks very much. You understand. So many loan officers want agents to send the buyer for a pre-qual before they even look at one house.
Seems to me, if I can qualify them BEFORE doing anything, my referral agents and brokers get good buyers and so do lenders.
We have few folks with credit problems. My web sites just don't appeal to them. I planned it that way. I'm looking for residential home buyers, families moving up, first time home buyers, luxury home buyers, etc. I'm not looking for investment buyers, credit repair folks or "just doing my research" folks. I'm looking for searious home buyers.
The sooner they get on the road, the sooner they are ready to buy. THAT'S when we need a lender.
I'm not fooled by the loan folks who warn about credit problems, qualifying, etc. and recommend the buyer's first stop be with the lender. They figure that if they get the buyer early, the buyer will stay with them.
Suppose the buyer decides to buy a fixer-upper. Most of the lenders I know don't know how to do a 203k. Suppose the buyers decides to buy new, they are probably going to get a much better incentive package with the builder's lender.
Getting the buyer to the lender is for agents that don't know how to qualify. That's a fact.
I'm sorry it took me so long to get to this post, I have a pet issue at home that's taken all of my time, as for your post you bring in valid points and as for Matt Blum or Jason Price and Brian Brady, I have the most respect for them and I am a long term professional who loves to be associated with them and yourself of course, I am usually in the back, sort of quiet But I do read everything and i'm always around :0)
Lenn you have great insight and wisdom. I think it is so important that there is clear communication between the real estate agent and the lender. One size does not fit all -- the lowest rates may not be the best fit for a particular client -- and different lenders have different products - the bottom line is whether they community, are ethical and can close the loan. Congratulations.
I am embarrassed to say, but I have been having issues, trying to figure out the graphics part here on Active Rain, I appreciate any of your suggestions though, I am working on it as we speak..
Lenn, I can certainly understand your goal with prequalifying them, and I'm happy to hear that most people that inquire through your Internet presence are credit worthy. I suppose our markets are different because I've had a different experience in my market with a number of people anxious to buy but are a few steps away from being credit worthy.
Good for you! Maybe I should move to Rockville from Honolulu... nah! :)
Great article. As a mortgage originator for over 10yrs, I prefer to deal with prospective clients once they have identified a specific property. If the buyer has a house in mind it allows us to discuss different loan options using accurate figures (i.e. offer price, taxes, etc.). If a buyer calls to be pre-qualified before they have started to look at properties with an agent there are a number of variables that can affect the pre-approval. If a loan officer works up a pre-approval based on a "potential" yearly real estate tax figure and the buyer then finds a house in a much more expensive (tax) area, the initial pre-approval could now be invalid due to affordability issues. Obviously I welcome the opportunity to speak with buyers regardless of what stage of the buying process they are in, but I much prefer to deal with concrete figures when presenting different financing options.
Lenn, I am a fan of your blog, you seem to really just "get it."
However, I have to comment on the "rent vs. buy should be buy at a lower price". I am in Montgomery County, I am a government employee, my husband and I have good salaries. We are sitting on a pile of cash, but the only thing we can afford to buy according to conservative, traditional lending guidelines would be a 1br/1ba condo. Sorry, but we need to have quality of life. We are not interested in living somewhere that we hate just so that we can buy in a declining market. What would be the point? I know you understand this because I've read some of your past entries. I want value for my money and a tiny condo does not suit my needs.
I find it hard to believe that the average working DC couple with no kids will no longer to be able to buy an actual house. Who is going to buy all of these houses if people like us don't? Paris Hilton?
Also thanks for your comments about brokers. It is a shame because as a buyer I would prefer to shop for my loan first. But although I would know better than to accept prepayment penalties or a lousy interest rate, I guess there are too many people who wouldn't.
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good points...
and I agree with Brian about the hacks...
but the one thing I will say is that you DO benefit from your relationships with your trusted mortgage partners...
you do receive benefits from their diligence, honesty and integrity
your benefits are:
What do I mean by protected commission....well you showed an example of how a loan officer can foul up a deal... he didn't protect YOUR commission... but your mortgage partner will do everything in his/her power to create a positive and timely transaction environment so that everyone leaves happy... and paid.