The Four Rs of Purchasing a Home
2022 has produced one of the most unpredictable housing markets in recent memory, primarily due to wildly fluctuating interest rates. To truly understand this volatility and its far-reaching impact upon the current market, here is a quick rate summary for the first 10 months of the year. Buckle up your seatbelt!
- In January, rates hit a nine-month high. By the end of March, they were at their most elevated levels since late 2018.
- Mid-April delivered 13-year highs. The average lender was quoted at 5.5% for conventional 30-year fixed scenarios.
- Rates begin falling during the end of July and continued doing so the following month. However, the reprieve was short-lived: Late August and early September saw weekly jumps of 33 and 42 points, putting rates in the low 6% range.
- On September 26, Mortgage News Daily—the industry’s most accurate source of interest rate data—declared that we were at 20-year highs.
Yes, reliving all that instability was probably stressful. But doing so was essential to better understand how the current rate environment is negatively affecting housing affordability. A homebuyer in January who secured a 3.2% rate on a $500,000 mortgage would have a monthly payment of $2,162. With today’s 7.2% rate, that payment would be $3,394—a staggering 56.9% jump.
Another challenge buyers are facing is what many in the industry call “rate whiplash.” A homebuyer who started searching in July and then closed in September saw their mortgage rate fluctuate by roughly half of a percentage point every four weeks. Their expected payment declined by $64,000 from July to August before skyrocketing $118,000 from August to September. “The whiplash in mortgage rates between when homebuyers set their budget and when they make an offer is making it extraordinarily difficult to plan ahead,” said Redfin Deputy Chief Economist Taylor Marr.
Yes, the current market conditions are a bit alarming. But buyers should not be deterred—this is still a great time to purchase a home. Properties typically remained on the market for 19 days in September, up from 16 days in August and 17 days in September 2021. And for the first time since March 2021, the average sale-to-list ratio (99.80%) fell below 100%, which means that the typical U.S. home is now selling for less than its asking price.
To prepare your buyers—especially those first-timers—for today’s challenging market, we compiled the four Rs of purchasing a home. Share them with your clients as they take those first steps on their homeownership journeys.
Your buyer can start by reviewing their credit score. Let them know they are entitled to a free credit report every 12 months from each of the three major consumer reporting companies (Equifax, Experian, and TransUnion). Copies can be requested by visiting AnnualCreditReport.com.
Tell your buyer that one impactful strategy to prepare for their home purchase is to request a separate report every four months, this way credit is being constantly monitored over the course of a year.
If your buyer has a less-than-perfect score, let them know that even small steps can boost a score, such as paying down accounts that are close to their credit limits. Or, paying highest interest cards first while maintaining minimum payments on other accounts.
Of course, a credit score is not the only factor a buyer needs to review—they must thoroughly evaluate their budget as well. This means knowing what they can pay upfront for down payment and closing costs as well as what they can afford for their monthly mortgage payment. Remind them that once the numbers are crunched, they must keep this budget in mind throughout the homebuying process.
The decision to buy a home is one of the biggest a person will make in their lifetime. So, be sure to stress the importance of considering all the factors that go into a typical purchase. For example, where do they wish to live? Inform your buyer that the location of a property can impact eligibility for certain mortgage types. If they desire a house in a quiet rural area, they may be open to a USDA loan. How long they anticipate living in the home is another important factor. For a buyer who plans on purchasing a property, renovating it, and reselling it in 10 years, a mortgage with a 15-year term may be the best option.
This starts with the Loan Estimate and the Closing Disclosure. Urge your buyer to thoroughly examine both documents and if errors are present, to contact you as soon as possible.
Also, the review step in the home financing process must include any emails the buyer receives related to their transaction. Real estate wire fraud is one of the country’s fastest growing cybercrimes, so being extra vigilant during this phase of the buying process is essential.
Advise your buyer to verify all wiring instructions over the phone. And, warn them to be suspicious of emails requesting a change in wiring instructions as well as email addresses that are off by a character or two. Hackers often make small changes that mimic real addresses.
As you know, applying for and securing a mortgage is a complex undertaking. Inform your buyer that a clear and constant flow of communication between you and them will help make their borrowing experience a streamlined and stress-free one.
Here are a few factors to consider when communicating with your buyer:
- Expressing tone and emotion is more difficult when writing. Aim to make your emails and texts as clear as possible, striking a balance between professional and personable, that way you are not leaving room for misinterpretation.
- When communicating with a buyer, take note of your talking-to-listening ratio. Though you often have much information to share, it is essential that you do not dominate the conversation. By actively listening to your buyer, you will learn their needs and concerns, allowing you to take steps to find them solutions.
- While it may be tempting to delay sharing bad news, the best approach is to be direct and keep clients as up to date as possible.
- Consult with your buyer beforehand regarding their preferred method of communication. If they wish to text, be sure your messages are professional, concise, and easily understood. Also, be mindful of the time of day when you send text messages. Just because you are working well past normal office hours does not mean your buyer will be up to receive them.
- Always thoroughly re-read an email or text before hitting that send button. Make sure you do not fall victim to an auto-correct that changes a word to something incoherent or inappropriate.
- When you need to share a considerable amount of information or must provide a lengthy explanation on a particular topic, write an email or pick up the phone.
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