Someone sent me an article this morning about a major bank that will be offering a program to help people get into a home by providing them with up to $10,000. Honestly, as I read deeper into the article, rather than sitting there and mumbling to myself that this is another cheap shot by the big boys to grab market share, I thought, “Good for them,” (and then I grumbled a bit about them grabbing market share).
There’s absolutely nothing wrong with this, and there’s nothing nefarious about it – this type of program is projected to help up to 20,000 families and individuals get into a home, and that’s a good thing. However, before any of you accuse me of becoming a shill for the big banks, let me make my point – because I do have one.
On a $200,000 30-year fixed mortgage at 4.5%, the principal & interest payment is $1,013.37/month. Over the 30-year life of that mortgage, the borrower will have paid $364,813.20 – that’s $164,813.20 that the bank will make off that loan. If this big bank added NOTHING (like, say, an increased interest rate) and spent $10,000 to get that new loan, that $10,000 is only 6% of the overall profit. Lest you think me a fool for believing a bank would just GIVE UP that 6%, let’s take this to the next logical step.
It’s HIGLY likely that the interest rate for this program is going to be at least a point higher than the going rate for a 30-year mortgage – they have to have SOMETHING to compensate them for “giving” away $10,000. Same amount ($200K) at 5.5%, the principal & interest payment is $1,135.58 for a 30-year total of $408,808.80 and a $208,808.80 profit. By adding that simple point, they increased their overall profit by almost $45,000. Still, there’s absolutely nothing tricky or underhanded about this: they’re offering a service that requires something in return, a higher interest rate.
For some people, this is a perfectly acceptable trade-off, and they’ll sign on all day, and twice on Sundays. Before anyone you know jumps at this “free” money, give them this little thought nugget to chew on and digest:
The difference between the monthly payment at 4.5% (the rate given to someone NOT accepting the “free” money) and 5.5% that comes with this generous program is $122.21. If you take $122.21 and invest it every month in something earning as little as 5% interest, you would have $10,279.48 in just six years. That’s over $10K in YOUR POCKET, not anyone else’s, and that’s a good thing, right?
Big banks have bigger fees, without a doubt. Someone’s gotta pay for all those commercials filled with beautiful people driving nice cars and acting like money is the least of their concerns. That’s not a slam on big banks (ok, maybe a LITTLE), just a fact. The $10K they’re “giving” you gets used up a lot faster by their fees and whatnot (I love that word).
Here’s my recommendation: GO to the big bank (I mean it) and have them put together a loan estimate for you (including all their incentives), and then come to us, a broker. And after we’ve helped you buy your house, come back in six years (or sooner) with that money you’ve saved and invested, and we can show you how to make even more money with it. THAT’s independence, for sure. Happy Independence Day!!!!!
Over 88 years ago, on April 18, 1930 for the 8:45 p.m. news broadcast, the BBC’s news reader came on the radio and had nothing to communicate. He had been handed a script that he was to read – “There is no news” – so he read exactly that. Following those four brief words, piano music was played for the rest of the 15-minute segment before returning to broadcasting from Queen’s Hall in Langham Place, London, where the Wagner opera Parsifal was being performed. Simpler times!
Whether you view it like the kid who learned how to make crude sounds with his hand and armpit that you found funny in third grade for three or four days before it got old or like the latest flu that will pass in less than a week, the news comes in cycles that burn out after a while and we turn our attention to something else. One of those news cycles near and dear to our hearts in the real estate/mortgage world, of course, concerns millennials and why they’re holding off on buying their first homes. I realize that news cycle has run its course, and it was more than a few cycles back, but this is my newsletter, so I’ve decided to bring it back. Humor me. I promise it’ll be better than armpit sounds and far easier to take than a flu.
After a lot of virtual and literal hand wringing, the pundits told us that there were many reasons millennials were holding off on making their first home purchase. One of the chart toppers was student loan debt. Another one that ranked right up there with student loan debt was an unsure job market. Without a doubt, those are two major considerations/reasons that will affect ANY home purchase, especially a first one, so please don’t think I’m making fun of them, because I’m not. My particular favorite, though, is sort of a catch-all reason that is both declarative and ethereal at the same time: the Baby Boomers ruined the economy! Now, with this one, I am gonna make a little fun of it – just a little. Using “the Baby Boomers ruined the economy” as the reason for not buying a home is like Jerry Jones, owner of the Dallas Cowboys, saying ticket sales have fallen because the paper companies are gouging him on paper prices. In other words, it’s a general answer that doesn’t REALLY answer the question.
As that particular news cycle about millennials and home sales began to burn out, nothing too definitive was ever revealed –much like most episodes of the evening news – so our attention was drawn elsewhere. When this happened, the smarter agents and mortgage professionals put some lotion on their hands (for the wringing, not the armpit thing) and decided to focus on other ways to find prospective home buyers. One of the most effective focuses I’ve seen lately is down-payment-assistance programs. Hear me out!
Yes, past issues of this newsletter have centered around the reasons DPA programs aren’t the best thing for your clients, and all of those reasons still hold true. The reason, though, that I say it’s been wise for agents/LOs to focus on DPA programs is that they catch buyers’ attention. This is sort of like the weight-loss commercials that show an obese man with a 28” neck and a 48” waist in the before picture and the same man with a 28” waist and a 48” chest in the after picture with tiny writing that reads “results not typical”. No, I’m not suggesting a bait-and-switch scenario. I’m merely saying that talking about a DPA program gets the phone ringing because it causes people to wonder if a DPA program is right for them. Once the agents and LOs can get the people reaching out to them, they can start a conversation and get them what they REALLY need. Such an approach makes far more sense than waiting around to learn why someone is waiting around, wouldn’t you agree?
“We’re from the government, and we’re here to help.” There are multiple jokes out there with that as the punch line, but we won’t go down that path today –it could lead to some pretty dark and/or inappropriate places, and this is a family show. I’m not down on the government, and that’s not the point of this week’s newsletter, but this is a cautionary note to all of you out in real estate land about a government program here in Arizona called Pathway to Purchase –I’m sure each state has a similar catchy-named program.
For those who qualify for P2P (we even have a cool acronym, right?), they can get up to 10% of the purchase price or $20,000 (whichever is less) FREE to be applied to the down payment and closing costs. Bring it on! The qualifying individual(s) can have an income up to $92,984 (I’m sure that oddly specific number comes from some pointy-headed individual deep in the bowels of our state’s bureaucracy), and the purchase price can go up to $371,936 (Mr. or Ms. Pointy Head strikes again). A credit score of 680 or higher is required (the guidelines say 640, but believe me, it NEEDS to be a 680), and the property has to be located in one of 26 ZIP codes. If your buyer checks all these boxes, you’re off to the races, right? Maybe.
The program has a $15 million commitment, and it’s available on a first-come-first-serve basis –nothing wrong with the Early Bird Gets the Worm concept. Here’s where it gets . . . dicey–as in, rolling the dice. We as the lender can’t apply for any funds from this program UNTIL THE HOUSE IS UNDER CONTRACT. You read that correctly. What this means is that we can’t give you a reasonable sense of confidence when we prequalify your buyers if we base our qualification on the fact they are relying on the funds to pay for their down payment and closing costs –we can only hand you the dice and hope you roll a good number. Remember, while the program has a $15 million commitment, there’s no way to go to a website to see what’s left in the coffers–and while $15 million is A LOT OF MONEY to all of us mere mortals, that amount doesn’t last very long. We speak from experience from the last time P2P made its appearance here in the Copper State.
We learned something else very interesting from the last time P2P was here acting like Santa Claus: in those eligible areas, home prices went up much faster because buyers were flooding in, making offers, and buying up homes. It’s going to happen again, you know that. We would HIGHLY recommend taking a look at the list of 26 ZIP codes and showing homes to your clients . . . in the next ZIP over –hear me out. It’s likely the home in the unapproved ZIP code is still in the same school district, near the same shopping, etc., but you’ll be able to get a better price for a home for your client or get them more house for the same price as those in the approved ZIP code next door.
One more thing to know about P2P (and many other down-payment-assistance programs), the debt-to-income ratios are lower, and the interest rates are slightly higher. This means your client, if relying on the funds from the program, will qualify for significantly less house.
If a lender approaches you and tells you that they can DEFINITELY get your client approved with Pathway to Purchase funds, ask them to roll up their sleeves and show you their forearms –they’re probably covered with fake Rolexes that you can get for a cheap price. And if you buy one, roll the dice and hope the watch lasts long enough for your client to come to us and get APPROVED with verifiable options.