Mortgage rates are the highest they’ve been in years. Inventory is tight and home prices have stayed elevated. Thus, many prospective homebuyers who thought they had their finances buttoned up are suddenly having to recalculate, and often stretch, if able to purchase at all.
Will that change? Not likely, at least for a while. Recent estimates from Freddie Mac show the housing shortage in the U.S. is at around 3.8 million units, as inventory indeed remains low. And the latest Consumer Price Index (CPI) numbers may mean that the Fed continues to hike rates.
Melissa Cohn, regional vice president of William Raveis Mortgage, in New York and other states, agrees that it may be a smart move for prospective homebuyers to forge ahead with their plans, regardless of overall conditions, because buyers may find home prices even higher (but rates lower, allowing for refinancing), if they wait.
“Unfortunately,” she says, home prices are “not dropping the way people expected them to when rates went up, and they’re not going to drop. They will continue to go up as long as inventory remains low and there’s sufficient demand.”
Thus, many people looking to achieve homeownership have difficult decisions to make. Online mortgage tools provide the precise monthly payment cost once term and rate have been inputted. But first-time buyer hopefuls may not take into account all the other expenses owning a home entails. It’s one thing to be “house-poor,” understanding and accepting that there will be little or no money saved after mortgage paying and equity building, and quite another to become overwhelmed and potentially imperiled by outgoing funds outpacing income.
Where does that leave you as the agent? How involved with clients must you get regarding their income and ability to handle the biggest expense of their lives? It can be a fine line between asking one too many personal questions and making sure you’re not spending too much time with people who will not get to the finish line and close.
It wasn’t all that very long ago that finances and mortgages weren’t crucial topics for agents, who simply assumed clients had the money. The aforementioned inventory issues and stubbornly elevated prices changed that, a bonus of sorts for REALTORS® as mortgage pre-approvals, often a key factor to get an accepted offer, made asking too many financial questions moot.
But until closing papers are signed, house keys presented to the new owners and commission checks deposited, nothing can be overlooked. It is up to you to make sure clients have deep enough pockets to close. The only disappointments should be losing out to higher bidders.
“An agent is a combination of being very comforting, encouraging and supportive of clients, and also factual, realistic and the bearer of both good and bad news, with recommended solutions,” says Pam Rosser Thistle, a REALTOR® with Berkshire Hathaway HomeServices Fox & Roach, REALTORS® in Philadelphia, who adds that she has no qualms with bringing up finances right off the bat. “We are the guide to help buyers achieve their goals by explaining the process, providing resources and of course showing them properties.”
The ‘hidden’ expenses
Homeowners understand the extra bills because they’ve experienced them, but those who have never owned a residence might not be fully aware. They are the “hidden” expenses that come with keeping a property in good stead. A recent survey by Zillow and Thumbtack estimates they can add over $1,000 to the monthly payment for a typical home.
Taxes and insurance are the obvious ones, but it’s not uncommon for homebuyer hopefuls to neglect to take them into consideration when initially calculating the monthly mortgage. Condo and co-op buyers will also be paying homeowners association dues that can be quite hefty, and are in addition to the mortgage. And as partial owners of the building, assessments can come out of nowhere. It’s not unusual to be told that a new roof or other major construction project is needed, with a new and long-term monthly charge in the hundreds of dollars.
Utilities are another fee that must be accounted for. Electricity, gas, water, sewer, etc., add up. Then add on home maintenance, fixing whatever breaks, etc.
“When I first meet with a buyer, we generally go over all of the fees they are going to encounter along the way,” says Broker Associate Jeffrey Decatur with RE/MAX Capital in Latham, New York. “Their previous living situation will determine exactly how deep of a conversation that is. We as agents have to realize that this is second nature to us, but to a first-time homebuyer, it may not be.
“Many times buyers coming from apartments are not aware of all the additional things they will have to pay as a homeowner. And those coming from their parents’ home don’t always realize that water, sewer and trash, in some municipalities, are not included in taxes, and are actually separate bills. Some don’t realize that gas, electricity, internet and TV are not included either.
“One of the very first questions I ask is, have you talked to a bank or mortgage professional? If they have, I verify the validity of said qualification because sometimes buyers can get a letter online without ever talking to anyone, or having anyone review their financials.
“If it’s valid, great. If it’s questionable, then I provide a list of several mortgage professionals, typically one at each of the banks I come across locally. I tell them I can’t choose who they use, but I have worked very successfully with these folks in the past. If the potential buyer has a special situation, like a lower credit score, I may tell them these folks specialize in people with dings on their credit, or first-time homebuyers. If they have great credit, I may point them to another bank.”
Pre-approval education
The most obvious thing agents must try and make sure clients do is get a mortgage pre-approval. While it won’t automatically eliminate other potential financial issues, it’s a great start. The pre-approval process will educate buyers beyond just what kind of term and rate to sign up for. They’ll learn that there are added expenses and other various, sometimes complicated aspects to becoming an owner.
“Getting a buyer pre-approved is the first step in the home-buying process, not only for a budget, but to see closing costs, which vary by state and county,” says Thistle. “Besides the down payment, buyers may not think of escrows for taxes and insurance, appraisal fee, tax prorations and other miscellaneous costs.
“For newer agents, I would recommend they get to know some lenders who can help them understand the pre-approval process. That will give them confidence and talking points when discussing why this is needed in the beginning of the home-buying process.
“Also, being a W-2 salaried employee is in their favor over being a 1099 self-employed entrepreneur. There are also government funds that flow in and out quickly for first-time buyers or buyers who purchase in certain zip codes.”
With so much information, Decatur makes sure clients understand that the buying of property is a business, first and foremost, one hopefully leading to a happy ending, but that he has needs as well.
“During the consultation, I explain the value of my time and our time together, and how to best maximize that,” he says. “I’ll tell them that I don’t want to waste their time showing houses they can’t afford, so having all of our ducks in a row makes sense. You don’t want them to go off half-cocked and find out they can’t afford something they fell in love with.
“Typically, if you lay the groundwork properly and manage expectations, clients will agree and follow the plan, especially if you use personal stories and examples. Most people are afraid to make a bad decision, so let them know you are there to help them interpret the market and guide them.”
Key takeaways
- With high interest rates and home prices, getting mortgage pre-approvals is more important than ever.
- Explaining to clients the “hidden expenses” with homeownership often reveals who can and cannot afford to buy a home.
- Providing a list of local mortgage professionals can save you and clients a lot of time, hastening the closing process.
- Asking about client finances upfront can help you determine what they can afford, and save you from showing houses they cannot.
