July Real Estate Roundup: 3 Lending Tips

The markets are showing some positive signs, but slow and steady wins the race. In the meantime, here are some lending tips to help your clients navigate the current conditions as they prepare to purchase!   

1. Paying discount points may be the best bet  

According to Zillow, 45% or more of buyers are paying points this year. With the rise in interest rates from 3% to 7%, combined with the increase in home prices, more and more buyers are electing to pay a partial or full point to buy down their interest rate in exchange for a lower monthly payment.

Prior to the Federal Reserve’s historic quantitative tightening in 2022, a general rule of thumb was for every discount point your buyer paid, their rate would decrease by .25%.  However, in the current secondary market environment, where loans are packaged and sold off to Fannie Mae, Freddie Mac, pension funds, etc., this normal correlation has become skewed. In certain instances, we are seeing where paying a full point can save from .25% - .50% in rate, or even paying a partial point can save .25% on the rate.

Let’s look at a $400,000 loan with a 6.25% rate as an example. A .25% change in the interest rate would save the borrower approximately $65 a month on their payment. If that cost the borrower a .50% discount point, they would pay $2,000, meaning they would break even in approximately 2.5 years. However, if that drop in rate costs 1%, or $4,000, it would take approximately five years to break even.

Each borrower is different, and at Atlantic Bay, rest assured we will educate your buyers on the pros and cons of buying down the rates and consider how long they plan to stay in the house or when they may refinance in the future. The important point is that in this current seller’s market, buyers who are looking for the best rate and lowest payment may benefit from buying points. It is important to understand this trend as it directly impacts the overall closing costs for your client.   

2. Closing costs have risen. 

As explained above, a big driver of why the old 3% for closing costs in many markets no longer holds true is due to buyers paying discount points.

However, like many other factors, we’ve seen inflation and the cost of compliance play a role as well. Appraisal fees have increased, especially in resort areas where higher-priced properties or the location can add hundreds of dollars to the normal fee. Attorneys have raised their closing fees, and lender fees for verifying employment, Social Security numbers, running fraud checks, and so on have increased too. Also, many brokers are charging administrative fees to help cover their overhead costs as well. Of course, if the property is in a flood zone, requires a well or septic inspection, a foundation certification or a condo questionnaire, this will add to the overall cost.

Because many of these fees are fixed costs, for sales prices under $350,000, the percentage of sales price increases. We are seeing closing costs run closer to 4%, but they can be higher or lower depending on many factors. It’s important, once your client has identified a potential property, to call or e-mail your Mortgage Banker to get a closing cost worksheet, so all parties know the total cash required for the transaction. 

3. Pre-approved means more than “pre-qualified”  

Pre-approvals are always better than pre-qualified, and there is a big difference.

At Atlantic Bay, we upfront underwrite every loan, so your clients can be pre-approved for the exact amount they can afford. This means I work with them at the very beginning to get their documents and credit information to verify their financial picture. This saves you time by only showing homes within your buyer’s budget, gives the seller more confidence in your buyer because an underwriter has already verified them, and makes for a faster closing process.

“Pre-qualified” simply means a buyer speaks with a Mortgage Banker for a general idea of what they can afford based on what the buyer tells them about assets, income, etc. No credit is pulled, and no documents are required or reviewed.

Finally, remember that if your client doesn’t have a property in mind yet, our Fast Track Buyer Advantage: pre-approval option will help you start shopping without an address. This gives your clients a huge advantage because many other lenders only review files with a signed purchase contract.

Call me with any questions you have, and don’t forget about that closing cost worksheet!