Financing in a COVID World - Leaders Edge Training

Since financing plays an integral part of the real estate transaction and most buyers require a mortgage to purchase a house, you should have an intimate awareness of how the qualification process works and how things are changing.

No matter which side of the transaction you are on, this is a conversation worth having. For the last decade, there has been a trend to hand off the mortgage component of the real estate transaction to a mortgage broker with little involvement from the real estate professional.

When I ask agents today about the four pillars of lending or the qualifying process for a buyer, they look at me like I’m speaking a different language. Understanding lending policies and being able to effectively communicate those policies to your buyers will allow you to close more deals.

Due to the challenges arising from COVID, the landscape of borrowing is changing, and it is starting to get more difficult for people to get mortgages. Here is why:

COVID has made the 2020/2021 market unpredictable
Many people have lost their jobs permanently
As of May 10, over 4 million US borrowers were in mortgage forbearance programs
Many borrowers have declared financial hardship and have delayed mortgage payments for up to 1 year.
Mortgage forbearance now accounts for about 8% of active mortgages in the US (pre-virus they represented less than 1%)

Let’s begin with the four pillars of lending:

1

Appraisal

For the past number of years, the appraisal process has been weak. Many appraisers just do drive by appraisals, or when they do an onsite inspection they run in and out in 10 minutes and call it an appraisal. Don’t be surprised going forward if we return to full-on appraisals with more conservative outcomes.

2

Down Payment

Buyers have always had to show they’ve saved the down payment from an unborrowed source (and have two months of bank statements to prove it). However, lenders have been liberal with this policy. For example, I know real estate agents whose clients didn’t have enough of a down payment and they borrowed their down payment from their credit card and deposited it in their bank account. Because they were inside their ratios on their borrowing power, the bank turned a blind eye. This type of creative financing most likely won’t get through any longer as banks tighten up on their policies.

3

Ability to repay the debt

Lenders use acronyms called GDS (Gross Debt Servicing) and TDS (Total Debt Servicing). Lenders are starting to get more conservative because they are concerned about the economy and potential mortgage defaults in the future. For example, in Canada, lenders previously allowed 39% of your income to go toward mortgage servicing and 44% of your income to go toward your total debt servicing. New rules have decreased your GDS to 35% and TDS to 42% reducing the amount of mortgage people can qualify for.

Banks are also starting to take a much closer look at employment and proof of income with so many people being furloughed these days. They will want a letter from your client’s employer stating your client is currently employed and will not be laid off, as well as their most recent paystub, a 1099/W2 (or T4 in Canada), bank statements and a credit report. In this COVID environment, it’s not as easy as just asking the boss to send you the required paperwork. With many offices closed and employees working remotely, getting these documents can take more time than usual. Prepare your buyers for this and ask them to start getting everything in order as early as possible.

4

Credit Score

Lenders are raising qualification standards for mortgages. It is getting more difficult to get jumbo loans above $750,000 in most markets, or to finance investment properties. Many lenders may very well reduce the number of units they are willing to finance for any one person. In addition, most lenders today have moved the credit score threshold from 600 to 680 because they are looking to invest in better quality borrowers.

So how do you communicate this to your clients?

On a positive note, mortgage rates are at an all-time low, so if you have qualified buyers, there couldn’t be a better time for them to buy. With the unpredictability in the market, it is time to have serious conversations with your buyers to set the right expectations and get them qualified up front.

Expect a longer qualifying process
Expect lenders to ask for more documentation
Expect higher thresholds to access great rates

My advice? Call your preferred mortgage broker and ask them to send you a checklist that you can share with your clients to ensure they can obtain a commitment letter, strengthening their negotiating power in an undersupplied market.

Chris Leader
President
Leader’s Edge Training