Capital reserves are absolutely key to success
A cutthroat seller’s market for homes is forcing brokers and originators across the country to do a delicate dance. They have to prepare clients for stiff competition and the likelihood that new costs will crop up that wouldn’t come into play in a more normal market. Brokers and originators have to be the bearers of bad news, at times, while keeping clients confident that they will be able to buy that home.
John Sarkisian has been doing exactly that since the market took off. The broker/owner at Fortress Home Mortgage told MPA some of the steps he takes to help his clients win out. He explained the range of significant costs that his borrowers might be subject to and highlighted what he does to prepare them. He emphasized, too, how he manages client relationships when he has to be the bearer of bad news.
“People are making offers with appraisal guarantees,” Sarkisian said, when asked about some of the more significant costs borrowers are carrying these days. “In a multiple-offer scenario, of which there are many in today’s market, buyers have to guarantee the appraisal up to a certain dollar amount. When these homes sell in a bidding war, sellers recognize that their house isn’t going to appraise for what they’re being offered, so when they accept offers they’re asking for appraisal guarantees. That means the buyer is paying out-of-pocket for the amount their offer comes in over the appraised value.”
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Sarkisian explained that these out-of-pocket costs can run into the thousands, or tens of thousands, in certain situations. This scenario has become so common that he now explains to each of his borrowers that his lenders will only lend on the appraised value and they need the cash reserves to cover the extra cost.
While for asset-rich or more liquid borrowers, that extra amount might not be a problem, a large number of first-time homebuyers might have the income to afford a mortgage but not enough assets to cover these closing costs in addition to the down payment. In some of these instances, Sarkisian shifts his borrowers from a conventional loan, requiring 5% down, into an FHA program that only requires 3.5%. While that route may have its drawbacks, Sarkisian believes that in certain scenarios it can free up much-needed liquidity. As a broker, Sarkisian can also get his borrowers a closing cost credit from certain lenders which can help alleviate some liquidity pressure.
Conversely, Sarkisian believes that one of the biggest mistakes a mortgage pro can make in this market is to not verify the client’s cash reserves upfront. Once the client is over the employment and credit hurdles, their broker has to make sure that they have the cash reserves to handle extra expenses and closing costs that might seem hidden.
While Sarkisian defers to real estate agents as his clients’ primary guide in the market, he serves as a source of sober second thought for them. It’s his role, he said, to remind them to be careful and not outbid themselves into something they can’t afford. While he can sometimes be the bearer of bad news, Sarkisian frames any disappointment as an opportunity for improvement. He positions the news as something akin to a grade in school - despite working hard, sometimes you get a lower grade, and that just means adjusting plans and working harder. He frames disappointing financial news as an opportunity for the client to improve their position, grow, and go after their goal from a stronger position.
As mortgage professionals look to navigate these rough waters, Sarkisian believes that nothing will prepare them as well as diving into their work and learning firsthand.
“You have to learn as you go,” Sarkisian said. “You can’t learn this sort of stuff in a bunch of books. You have to put your foot in and walk through the fire and learn from the experience that comes when you’ve screwed up and you realize what you should have done. I would tell other originators to stay consistent in taking applications and learning as you go, because there’s always going to be a scenario you haven’t run through yet and the more business you do, the more likely you’re going to gain experience that can guide you through any borrower’s application.”