More often than not, you’re competing with other mortgage originators who offer the same conforming loan products. That’s why it’s crucial to think about offering innovative loan products that get the attention of real estate agents. Not sure where to begin? Here’s how you can stand out from the competition and connect with more agents in the coming months.

Flexible programs

Although homebuyers may want to make a traditional bank their first stop for financing, that isn’t always the right choice. Sure, the rates may be lower in some cases, but this comes at a cost. Strict guidelines paired with even stricter loan products make it difficult for an agent’s nonbankable clients to find a loan. That’s where you come in.

Since all homebuyers have unique mortgage needs, it’s important to offer programs that give today’s buyers more flexibility than conforming lenders are willing to offer. How can you do that? By affiliating yourself with lenders that offer a full suite of alternative loan products. Real estate agents want to work with originators who are well connected and have access to a wide range of products that may better fit their clients’ financing needs.

Take, for example, a self-employed borrower. They may be creditworthy and have a successful business venture, but because their tax returns may not reflect actual cash flow, banks and other traditional lenders are hesitant to give them the green light for funding.

When this occurs, a real estate agent will want to team up with an originator who can offer a unique solution that will give them the “yes” their clients want to hear. For example, working with a lender that offers 12- or 24-month bank-statement loans will enable you to offer the borrower a program specifically suited for their unique needs. Strengthening your lender partnerships will help you diversify your loan offerings while making you a go-to source for out-of-the-box solutions.

Diverse products

It’s no secret — the demand for nonqualified mortgages (non-QM) is skyrocketing and is expected to continue growing in the near future. While qualified mortgages may work in some situations, non-QM loans offer more flexibility in terms of buyer qualifications and loan terms.

It’s key for you to partner with lenders that have robust non-QM offerings. By adding these to your portfolio, you’ll have more options for real estate agents and their clients. Most importantly, they’ll feel more confident that their deals will actually close when they partner with you. Three non-QM products in particular that can have an impact today are bridge loans, non-warrantable condominium loans and foreign-national loans.

If a seller has the choice between an offer that’s contingent on the buyer selling their current residence and an offer that isn’t so contingent, chances are they’re going to pick the latter. Unfortunately, this makes it difficult for the majority of real estate agents who are working with buyers shopping for homes today.

In these cases, you can offer bridge financing to help agents secure their deals. The way it works is simple: Buyers can access equity from their current home to purchase a new home. These are short-term loans (typically one year) that are repaid when the property sells or at the end of the term, whichever comes first. Some bridge financing programs come with no monthly payments or prepayment penalties. This is a huge advantage over hard money loans. The best part is that it allows a real estate agent to help a buyer gain a competitive advantage by making a noncontingent offer.

Besides dealing with a cooling market for single-family homes, real estate agents are also facing challenges in the condo space. Since the 2021 collapse of a condo tower in Surfside, Florida, Fannie Mae and Freddie Mac have tightened their restrictions on condo lending. Buyers must now answer a lengthy questionnaire about the unit’s structural integrity. If this form is filled out incorrectly, the deal is likely to be thrown out.

As a result, agents have experienced major fallout in condo loan demand. For these scenarios, you can offer a nonwarrantable condo solution, which allows a buyer to enjoy more flexibility and less stringent underwriting requirements. This gives real estate agents an alternative way to secure these types of deals.

In markets like Miami and New York, agents are often working with individuals from foreign countries, not just U.S. citizens. The problem here is that these buyers have limited financing options through conforming lenders.

To help real estate agents and their clients overcome this financing obstacle, you can offer a foreign-national loan product. With this mortgage program, a foreign credit report is accepted, and buyers are not required to provide domestic tax returns or credit reports. Incorporating a product like this into your offerings will help you reach even more agents who need help in securing financing for foreign nationals.

Readily available

Nowadays, it’s not enough for originators to work the usual 9 to 5, especially when refinance scenarios are scarce and you need to rely more heavily on purchase money business. It’s smart to go the extra mile, particularly with real estate agents, who are on the clock on weekends.

Think about it: Agents are often taking their clients to open houses on Saturdays. For this reason, consider making yourself available for an hour or two to answer any questions they may have about financing needs.

If you want to expand your network, another avenue is to offer to attend an agent’s open house in their place. That way, you have an opportunity to talk to potential clients in person. It’s a win-win for both you and the agent.

As the mortgage industry shifts, it’s important to keep up with the newest loan solutions and trends that make sense for homebuyers in today’s environment. Deeper partnerships with real estate agents will undoubtedly help you build your pipeline with new contacts, taking your business to the next level in the coming year. ●

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“This real estate slowdown isn’t exactly a bust. Housing demand continues to be strong even as supply remains paltry and affordability challenges persist.”

There are plenty of reasons why mortgage originators should get back to the basics of prospecting and making phone calls. But how do you do it? Here are some tips for making the most of this fundamental strategy.

Establish rapport

While technology has made it easier than ever to connect with potential clients, there’s still no substitute for the power of personal connections. When you pick up the phone and call a prospect, you’re able to establish a rapport that’s simply not possible through email, social media or even video marketing.

As mortgage rates doubled in 2022, refinance originations all but disappeared. Americans weren’t eager to replace their sub-3% loans with ones above 6%. Purchase loan volumes haven’t been much help. The National Association of Realtors (NAR) reported that month-over-month home sales declined for 12 months in a row through January 2023.

Not that you need to be reminded of the dreary statistics, but Attom Data Solutions reported that mortgage volume fell to $476 billion in fourth-quarter 2022, down 57% from the same period one year earlier. The drop-off was largely caused by the sharp rise in mortgage rates.

Where can mortgage originators find shelter from the storm? Fix-and-flip loans offer a compelling opportunity. True, the housing market has slowed to the point that many in the industry have called the situation a “housing recession.” But this real estate slowdown isn’t exactly a bust. Housing demand continues to be strong even as supply remains paltry and affordability challenges persist.

Compelling opportunity

Real estate investors view the housing market breather as an opportunity. Monthly rents for residential properties are still high, but the drumbeat of negative news means that many builders have pulled back on construction starts. Their caution only exacerbates a housing shortage faced by millennials, a huge generation that’s in their prime years for household formation and homebuying activity.

Given the demographic tailwinds, savvy investors love the idea of generating income by adding to their property portfolios. Another macro trend that favors investors is housing affordability — primarily the lack of it. While home prices have peaked and even retreated in some parts of the country, the jump in mortgage rates has squeezed affordability, which reached a record low in Q4 2022, according to an index maintained by Wells Fargo and the National Association of Home Builders (NAHB).

“Rising mortgage rates, supply chain disruptions, elevated construction costs and a lack of skilled workers and lots all contributed to a declining housing market and worsening affordability conditions going back to the second quarter of last year,” NAHB Chairman Alicia Huey said earlier this year.

This reality has dampened demand among first-time homebuyers. Instead of moving into homeownership, many young adults are remaining renters for longer. While that’s a challenge for the overall economy, it also makes real estate investment more attractive.

Finally, many housing economists say the real estate market is already pulling out of its recession of late 2022. Home values are holding steady and mortgage rates — after topping 7% last year — have fallen back into the 6% range, which bodes well for lenders, brokers and borrowers.

New reality

Fix-and-flip loans are ideally suited for real estate investors who are adjusting to the new reality of the housing market. These products were created for investors who want to leverage the purchase and renovation of a property. They’re short-term loans created for entrepreneurs who intend to exit by selling the property or refinancing into a long-term investment property loan.

With home flips still attractive to many investors, borrowers are looking for an outside-the-box solution for their unique needs. A typical fix-and-flip program might offer financing for up to 85% of the purchase price and as much as 100% of the construction costs on some projects. The total loan amount could fund up to 85% of the total cost.

Here’s a common scenario: Say an investor pays $275,000 for a property and expects to spend $100,000 on renovations. A lender would approve financing for up to 85% of the acquisition costs, or $233,750, and as much as 85% of the renovation costs, or up to $85,000.

Borrowers typically do not need to have stellar credit. Fix-and-flip loans may be available to borrowers with credit scores below 700. Terms fluctuate depending on the experience of the investor. A veteran flipper — one who has a successful record with multiple deals — tends to qualify for higher loan-to-value ratios and lower interest rates.

Sophisticated clients

Given the strange mix of a housing slowdown and a still-robust economy, entrepreneurs see opportunity in short-term rehabs. Attom Data Solutions found that more than 90,000 homes were flipped by investors in third-quarter 2022. While activity was down compared to earlier in the year, the period was still one of the most active quarters on record for fix-and-flip deals.

In other words, there’s plenty of demand from investors, but amateur hour is over. Savvy investors are the ones who are stepping up today. In the go-go period of the past few years, anyone could score on a rehab deal. Today’s more challenging market is one better suited for professionals — and they’re still out there rehabbing and repositioning homes.

The forecast for annualized home price appreciation had slowed to the 1% range as of this past January, according to NAR. Numbers like that reward skilled, sophisticated investors. On the bright side, the housing shortage continues to hover over the entire real estate market. That’s why home prices held steady even as mortgage rates doubled in 2022.

Consider foreclosures. Attom Data Solutions reported more than 31,000 U.S. properties with foreclosure filings in January 2023, up 36% from a year earlier. That’s a small number compared to the Great Recession, of course, but the upturn in default notices and repossessions indicates that the housing market is returning to historic norms.

This makes fix-and-flip loan programs ideal for the investors who are hanging in there during a leaner period. If you’re an originator who is waiting out the storm clouds that have descended over the industry in recent months, these specialty products can help boost your business. ●

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Understanding the full picture of a business owner’s income stream can be tricky. Understanding the income and expenses of a business may require examining multiple sets of bank statements as well as various income sources. Assembling all the pertinent information means you have to ask smart questions.

Solving puzzles

Mortgage originators want to offer the best available loan options for their clients. Bank-statement loans provide excellent opportunities and flexibility for self-employed borrowers. This flexibility can help originators win more business.

Underwriting for agency loans is a straightforward matter of looking at W-2 forms, which have very little wiggle room. But digging into a bank-statement loan requires further due diligence. These loans aren’t one size fits all.

Each self-employed borrower’s situation is unique. To take advantage of these loan opportunities, originators must examine every detail of their borrower’s financial background to ensure an optimal situation.

Given the unique nature of bank-statement borrowers, mortgage originators can feel a bit like they’re solving a puzzle. The right questions aren’t always obvious.

Multiple accounts

Start your underwriting process with a simple rule: Don’t presume that all business owners manage their companies the same way. There’s no one way for a business owner to set up their bank accounts.

For instance, it’s quite possible that a food- service entrepreneur has separate bank accounts: one for cash receipts and another for credit card payments. Many restaurateurs have multiple locations, with separate bank statements for each. If you look at only one of these accounts, you won’t get a full picture of the borrower’s finances. The obvious risk is that you’ll say no to a borrower who really is creditworthy, if only you knew where to look.

A physician’s office might use one bank account for insurance company reimbursements and another account for payments made directly by patients. This can be an easier way to run the business — but if an underwriter doesn’t look at activity in both accounts, the doctor might not qualify for a loan. What’s more, a medical practice with multiple locations likely has multiple bank statements.

You may run into a situation where you have a married couple and each person generates nontraditional income. Let’s say the couple has separate bank accounts, one for income via rental properties and a second that shows their business receipts — she’s an artist, he’s a musician. The rental income alone might not be enough to qualify the couple for a mortgage, but a review of both accounts could.

Complete picture

The theme in all three of these examples is obvious: Borrowers often have multiple bank accounts and you’ll want to look at everything that’s relevant. By the same token, some bank accounts aren’t what they seem. Some business owners execute payroll from a separate bank account and simply transfer money in for payday.

To make the most of your bank-statement lending business, you need to invest time and energy into the transaction. Only by being flexible can you put together a complete understanding of the borrower’s finances. Take the extra time to understand how borrowers manage their books.

Another opportunity for flexibility arises in the expense factor. If you take a one-size-fits-all approach to expenses, you might deny some borrowers based on the asset-heavy nature of their businesses.

For instance, an engineer or programmer who works from home has few expenses for such things as office rent and cost of goods sold. An auto mechanic or retailer, on the other hand, has much higher expenses for facilities, labor and supplies. If you apply cookie-cutter underwriting to these very different types of businesses, you’ll miss out on lending opportunities.

The number of self-employed Americans was on the rise even before the COVID-19 pandemic, but this trend has only accelerated during the past three years. Bank-statement loans can help borrowers qualify based on their actual income instead of what shows up on their tax returns.

Verifiable income

Self-employed borrowers often have trouble documenting their income, even if they have strong financial pictures. Savvy tax planning means that business owners should reduce their income via business expenses. But the approval process for a traditional mortgage doesn’t accommodate this reality.

By examining bank statements, you’ll quickly determine true income figures for a borrower, allowing you to determine a debt-to-income ratio. This leads to a solid number that both the borrower and lender can work with to ensure prequalification and, ultimately, a successful loan closing.

You may work with many clients who are self-employed and fall into categories such as insurance agents, contractors, plumbers, attorneys, doctors, accountants, cosmetologists or property investors. Many of these borrowers possess substantial wealth but need to demonstrate income in a different way than a traditional W-2 borrower.

The details vary by lender, but a typical scenario involves a borrower providing 12 to 24 months of bank statements. Lenders also want to see consistent deposits each month. This can be in a personal or business bank account, and some bank-statement borrowers submit a combination of both.

● ● ●

The bottom line is that financing is available for borrowers who don’t fit into traditional underwriting boxes. You’ll need some creativity and the right partners to get these deals done, but options are available if you know where to look. ●

The post Don’t Shut the Door on Quality Borrowers appeared first on Scotsman Guide.

Each of these types of loans present opportunities for originators. Non-QM lenders are willing to finance properties and borrowers that the GSEs won’t.

Creditworthy borrowers

Make-sense niches

• Bank-statement loans. These borrowers are often self-employed and are frequently more affluent than those with W-2 incomes, but prudent tax planning means they show a level of income on their tax statements that precludes them from agency loans.
• Property investors. These loans focus on a property’s cash flow. They are underwritten based on rental income and mortgage debt — and given the strong rent-price growth across the country, many real estate investors are doing quite well.
• Foreign nationals. Residents of other countries can’t qualify for agency loans, even if they’re wealthy and can easily repay their mortgages. These loans are underwritten based on the foreign national’s stability and ability to repay.
• Nonwarrantable condos. Fannie and Freddie impose stringent rules around mortgages collateralized by condos. GSE-backed condo loans became even more difficult to obtain after new rules implemented after last year’s condo collapse in Surfside, Florida.
• Asset qualifier and asset depletion. These loans calculate income by determining the borrower’s total assets divided by 60 or 120 months.
• Bridge financing. This is a short-term loan that taps equity in an existing home, providing cash for a new home purchase with no monthly payments on the bridge loan.

Individualized underwriting

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To get an idea of the growth, consider this: about $10 billion of these loans, commonly called non-QM, were securitized during the first half of this year, according to S&P Global Ratings. That’s about double the tally for the same period last year.

Unfortunately, many originators and borrowers view these loans as just a new name for subprime loans. While low credit-score or high debt-to-income products are a portion of the programs available, there has been an increase in the diversity of programs and borrowers. Some examples of the new non-QM loan opportunities include:

Self-employed borrowers, who may have complex and diversified income streams

Foreign-national borrowers, who have no credit history in the U.S., and may have trouble qualifying for conventional programs, despite significant assets for a downpayment

Borrowers with significant assets, who can have trouble documenting their income, which makes conventional loans difficult to obtain

Many originators may be surprised by how non-QM loans can be structured responsibly while taking into account an ability to repay with competent underwriting.

Identify opportunities

Anyone who has been in this business for a while has seen the great credit borrower who is a little different. They do not fit the Fannie or Freddie underwriting box, yet when examining their entire financial story, they look like a dependable borrower.

In fact, they are just missing Fannie or Freddie guidelines. Originators need to be aware of the alternative loan programs that they can provide these clients. In addition to “saving the deal” by providing a solution, these types of borrowers are likely to recommend the originator to similar borrowers, resulting in more loans down the road.

You can identify these non-QM borrowers immediately by answering a few simple questions. Are they a business owner without a W-2 or tax records for their business? Are they a borrower with gaps in their income, but are “asset rich” with property, investments, retirement accounts and cash on hand? Are they an investor who has their income and assets tied up in their property?

These borrowers may be a non-U.S. citizen with a visa and, potentially, previous U.S. work history. It may not matter if they have U.S. credit as long as they have a foreign-credit history. Do they have a credit score of 620 or above? Is it an individual with no visa or green card who files their taxes with an individual tax identification number (ITIN)? When documented correctly, these types of borrowers may be better credit risks than borrowers of government-backed loan programs that encourage low credit scores, as well as high loan-to-value and debt-to-income ratios. 

Originators who are not considering their conventional loan fallout alternatives and potential second-chance options may find it challenging to earn as much as they did in the past when interest rates rise. Refinance activity won’t go on forever. The smart mortgage brokers and loan officers understand this and seek to optimize their marketing expenditures by having more alternatives for the folks knocking on their door for a loan.

“ Originators who create great relationships now with non-QM lenders will continue to prosper and grow in the coming months. ”

Distinct differences

Originators need to be aware that not all non-QM loans are created equal. Some put a strong focus on high-quality service, which can be helpful to the originator who is used to using an automated underwriting engine, such as Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector.

The non-QM space is more “high touch” than “high tech,” so some of the lender participants recognize the need to help originators through the process. Some focus on unique programs and others try to lead with price.

Generally speaking, most lenders offer bank-statement programs (12 and 24 months), but some offer shorter time frames, such as one- to six-month programs with other documentation and a reliance on loan-to-value ratios and credit scores. Asset-depletion programs, which calculate monthly income by dividing a borrower’s total assets by a set number of months, may use a lower percentage of assets toward income than privately sourced programs. 

Most originators are aware of the standard 120-month divisor that can make qualifying difficult. Some privately funded asset-depletion programs use a 60-month divisor, potentially doubling the borrower’s qualifying income. This can be the difference between an originator saying, “No, I’m sorry,” or returning to their client with a “yes” answer.

Dynamic market

Today’s mortgage environment is dynamic and moves quickly. Interest rates have had larger swings in the past 12 months than in the previous seven years.

Non-QM has moved from being a low-credit alternative for Federal Housing Administration loans to an excellent alternative for creditworthy borrowers. That’s especially true when you think of the growing number of borrowers who could use these loans, including 5.6 million business owners and an aging population of retirees with many assets. A good non-QM program can offer competitive rates and loan options that will meet their unique needs.

Originators who create great relationships now with non-QM lenders will continue to prosper and grow in the coming months. Originators should be quickly identifying borrowers who could fall into this segment and warming them to the idea of non-QM if they just miss conventional standards. Better yet, they should proactively advise these clients to apply for the best loan, so they save time and money.

Finding the best partner for your company in the non-QM space will require a little research, time and realignment of how one thinks about this type of lending. Lenders that offer an excellent menu of products and that actually deliver on high-quality support can be beneficial to an originator. Partnering with such a lender can enable the originator to continue to produce strong loan volumes, despite what may be happening with interest rates and their effects on conventional volumes. 

Drive volume

The non-QM market continues to look favorable for the rest of 2019. Loan programs that have entered the space as solutions for many types of borrowers are not the same subprime loans from 2006. They use common-sense under-writing, complete documentation and good-to-excellent credit scores.  

There are still many disenfranchised borrowers out there. The more that originators learn about these products, the more that will drive volume within the non-QM space.   

The market itself is underserved. Originators who have seen their volume drop, and who turn away one-third to one-half of their conventional leads because they don’t meet conventional underwriting guidelines, need to start expanding their relationships with non-QM lenders. By doing this, it will help them remonetize their leads and provide a broader set of loan solutions.

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