Over the past few years, we have enjoyed historic low mortgage rates. As the Fed continues to raise interest rates in an effort to tamp down inflation, however, we can expect mortgage rates to climb. Memories can be short – it’s almost hard to imagine a world where rates exceed 5%. Nevertheless, there was a time when a 5-7% rate was considered great! Still, younger buyers who have yet to experience high mortgage rates may find themselves a bit shell-shocked when assessing how much house one can afford.
While raising interest rates may bring housing prices down somewhat, it’s not likely that this will happen at the rate of inflation in the housing market.There are still other forces, such as low inventory, driving the cost of housing. It’s still a seller’s market and would-be buyers need to be prepared.
Here is what we are facing:
1. An inflated housing market;
2. Climbing interest rates;
3. Younger buyers who want to own a home, but are not sure how to manage high interest rates.
All this together means that the mortgage is likely to be a more prominent topic in relocation. From pre-approvals to ARMs to buydowns, transferees will have questions. As we wait to see how rates will fare through the summer, it’s a good time to revisit mortgage basics. What should your transferees consider in terms of mortgage shopping for their new home?
Your transferee needs to:
1. Determine the type of loan necessary: The type of loan will depend on the amount of time one plans to stay in that home. Is the relocation more of a long term assignment or is it permanent? Is the transferee a first time homeowner or are they refinancing?
2. Understand where they stand: This one is pretty much common sense. Naturally, a transferee with amazing credit and a huge savings account will have a pretty easy time securing a loan. However, a lot of people aren’t necessarily in such a great position and it’s important for the transferee to understand that their financial and credit history may require a lender with some strong underwriting flexibility.
3. Choose the right lender for their need: There are three types of mortgage lenders:
a. Retail Banks: Retail banks underwrite, approve, and close loans for homebuyers and either keep the loans on their own balance sheets, or sell them to investment firms who then bundle the loans into mortgage bonds. Working with a retail bank is great because they tend to be more flexible with loan terms since they can keep the records on their books. Plus, if you open a checking or savings account with them, they may even offer even lower mortgage rates.
b. Mortgage Banks: Mortgage banks are like retail banks in that they underwrite, approve, and close loans for consumers but a mortgage bank will always sell the loan to either a retail bank, investment firm, or Fannie Mae or Freddie Mac, who will then bundle the loan. Working with a mortgage bank has its benefits too. The designated loan agent serves as a one stop rate shop for the consumer and can move very quickly since they control the entire process.
c. Mortgage Brokers: Brokers go through either retail banks or mortgage banks to obtain a mortgage for the buyer. They can rate shop across a large number of banks which allows them to lend on tougher borrower profiles. In all honesty, this approach hasn’t been popular since before the crash in 2008. However, you can be sure that the mortgage brokers still standing are long term, highly experienced veterans in the business which is a good sign.
4. Get pre-approved: The market is moving quickly, so transferees will want to have a pre-approval prior to home-finding tours. They should also understand that the pre-approval amount is the number the bank says can be carried as a maximum amount. Lifestyle, financial goals, or future events may dictate your employee stay below this max. This is an important consideration for them to make when touring homes or putting in offers.
5. Understand the appraisal process: Lenders will require a bank appraisal to make sure there is sufficient value in the property to cover the amount borrowed. This is important because it has and will impact the seller in addition to the buyer because the bank needs to agree on the property’s value, even if the buyer agrees to the set price beforehand. These days, many of the offers being made, in a bidding war or take-out bid, are artificially high. While tempting, we advise that transferees requiring a loan not get caught up in a bidding war that pushes them past their comfort level.
6. Manage expectations: There’s no doubt we are in a challenging real estate market for home buyers. For this reason, it may take more time than normal for transferees to acquire a new home. They will need to be realistic with themselves (and their families) about the time they need and the house they can afford. We would encourage all transferees to start the process as early as possible, especially since the time it takes to sell a home is quicker than ever.
As mortgage rates continue to climb, XONEX will be watching housing market trends closely. Stay tuned for relocation benefit strategies that will help you help your transferees navigate this ever-changing environment.