When mortgage money is plentiful, and when it can be borrowed at reasonable interest rates, financing is a comparatively easy step in the homebuying process. When interest rates soar, as they have an aggravating habit of doing periodically, lenders become nervous and buyers have trouble qualifying. When that happens, the type of financing available on a particular property often becomes the most important factor in the whole process. To ensure your long-term success, you must continually stay on top of what is going on in the home-financing market. These are the basic options:
- Fixed-Rate Loans. Long-term fixed-rate loans will continue to be available, but they command the premium interest rate. Because this is the type of financing that most consumers understand and have experience with, it is by far their first choice. Know what the current rates are and use them as your standard of comparison for other options.
- Adjustable-Rate Mortgages (ARMs). In the past, lenders were badly burned when changing economic circumstances forced them to start paying more for their money while their assets were tied up in long-term, low-yielding real estate loans. To protect themselves, they have searched for alternative forms of home financing. The problem has been to find a solution that lenders like and that consumers will accept.
The program that has emerged as the leading contender is the ARM. In this loan, the interest rate is adjusted periodically (up and down) using as a basis some objective "cost of funds" standard. There will typically be a limit on how much a loan can go up during a year or over the life of the loan (called "caps"). The main problem with the ARM is that people do not as a rule consider worst-case scenarios and realistically assess their capability of making ends meet if their ARM goes to the limit. Lenders like ARMs, since the rate fluctuation risk is passed on to the borrower, so they offer ARMs at an attractive rate. Just make sure your buyers are fully educated.
- Federal Housing Administration (FHA) and Veterans Administration (VA). These two programs have been in existence through good times and bad and have provided sorely needed stability to the home financing industry. Each will likely continue to offer traditional fixed-rate loans as well as many of the newer options. Because of their widespread familiarity, and because of their built-in consumer protection features, buyers like to know what is available through the FHA and VA, so you need to be well informed.
- Creative Financing. When traditional ways of solving problems no longer work, and where large sums of money are involved, ingenious solutions emerge. In home buying, these solutions are called creative financing.
Although it is a term that covers a broad range of techniques, owner-assisted financing is one of the most common. Let's say a seller has $100,000 of equity in a $300,000 home, along with an attractive, low-interest, assumable loan of $200,000. For $20,000 down and a promissory note for $80,000 (secured by a second mortgage) at "interest only" payments of 10 percent with a three-year balloon, he will sell the home. The buyer assumes the underlying loan. The idea is that this will make the home affordable to the buyer, and during the three-year period, it can be refinanced. There will be no problem if the buyer can find affordable refinancing. If he cannot, he may be in trouble.
Owner-assisted financing is a legitimate and accepted means of facilitating a real estate transaction, but great care must be exercised to ensure that it is fair to all parties, and particularly to the buyer, whom you represent. All too often, creative financing has simply meant that buyers end up getting in over their heads because a transaction was made too easy for them, or they buy a piece of property that could not have qualified for financing through standard methods.
You see here a practical application of the principal of agency and realworld ethics. You are legally and ethically required to put your client buyer's interests first, certainly above your own. If you arrange shaky creative financing that gets the deal done and earns you a payday, that's in your best interests. But if down the road it comes back to bite your buyer, then you've obviously violated your fiduciary responsibility. It's also very bad business. Word gets around.
As noted in the previous example, an element of creative financing may involve assuming a loan that already exists on the property. The only safe way to determine whether a loan can be assumed or not, and on what terms, is to contact the lending institution in writing. Alot of innocent (and some not so innocent) buyers have been led to believe by unscrupulous sellers (and, regrettably, by real estate agents) that a loan was assumable when that was not the case. If the buyers do not plan to openly contact the lender and follow their instructions about assuming the loan, urge them to consult a real estate attorney for advice before proceeding. Make your recommendation in writing so it will be a matter of record.
Although you will be current on the general inventory, you need to revisit properties you have selected to show a specific prospect. You also need to review your files on expired listings and fizzbos to see if there are any possibilities for a one-party listing. When looking at the material on the multiple listing service, read the information carefully. If it says to show only in the afternoons, that is when you need to make the appointment. If it says not to let the cat out of the garage or not to pet Fang the Doberman, take notes. It is unrealistic to show more than five or six properties in one outing, unless the buyers have limited time and must work at an accelerated pace. To make the job easier, provide them with a form on which they can make notes about the houses they see. After a while, even the most veteran house hunters start to confuse properties. It is also wise to give them a copy of the sales agreement they will use when they make an offer, so they can study it.
Geographic convenience will likely dictate the order in which you show homes. I do not advocate showing less desirable houses first to "set up" the remainder so they look good by comparison. That technique, although still used, is so transparent that it will cost you in credibility. At the close of (or during) each house-hunting session, ask for feedback to see if you are on the right track.