Written by Ben Strube, Owner of Mortgage on a Mission and Member of CCAR's REALTOR® & Lender Committee.
Don’t let headlines scare your buyers away. While mortgage rates have risen, plenty of lenders offer rates below the national average. Finding the right lender with excellent pricing makes you look like a rock star and helps your on-the-fence buyer agree that now is the best time to buy that new home.
You're not alone if you’re dizzy watching mortgage rates (and news headlines). Rates have indeed been on a roller coaster since June. Rates have risen by about 0.50%, making a $400,000, 30-year loan cost about $120/month more than three months ago. Let’s look at what’s been going on with rates.
In June, the national average rate for a 30-year fixed conventional loan, across hundreds of lenders, was 5.47%. Two weeks later, the Conventional loan rate spiked, reaching 6.28%, an incredible leap of over 0.75%. Buyers who had locked in their lender offer certainly did the right thing—buyers who hadn’t locked in felt discomfort about moving forward with their home purchase. REALTORS® who watched rates were able to give their buyers more confidence when navigating this confusing time (link below).*
After grabbing headlines, rates quickly came back down in early July (around 5.50%) and fell again by early August (5.05%) following the Federal Reserve press conference. Buyers who had chosen a lender with a free float down policy were overjoyed. REALTORS® who helped their buyers find the right lender certainly looked great! Locking in at 6% and then floating down to 5% is always a welcome savings. Buyers who chose a lender without a free float down policy (but with 2-3 weeks left on their contract) most certainly started shopping around to find a better lender, and some had luck!
In August, rates bounced around quite a bit (between 5.00% and 5.50%) for the first two weeks, and then most recently climbed up to 5.95% (August 30th) following a strong Labor Department jobs report, inflation numbers out of Europe, and the Jackson Hole Speech by the Fed chairman, and the following week’s reaction by Treasury bonds.
So even though rates have been as high as 6.28% and as low as 5.00% in the past three months, rates have actually only risen by about 0.50%. For a 30-year loan of $400,000, that’s $120 extra per month ($2385 vs. $2264). Nobody wants to pay that extra $120, but let’s keep it in perspective. Rates aren’t at 6.50%, and rates haven’t stayed above 6% for long. Homes are still affordable for many buyers (taxes are another story), inventory is up, and buyers have more choice and bargaining power than they did back in June.
What’s A Good Rate Today?
With rates bouncing around and rising or falling daily by over 0.25%, how can you know what’s a good rate for today? Well, the national average rate is published every day, and because that number is just an average, that means that 50% of lenders are offering rates below this, and another 50% have rates above this.
So if today’s average is 5.95%, then half of the lenders out there can get your buyer a lower rate. That is hundreds of lenders with a better price. In fact, today, I’m seeing some lenders offering 5.50% with no fees, even as the national average rises far above this. You just have to find the right lender.
What about fees? Lender fees should be zero (for a 760 FICO) and 0.25% - 1% of the loan amount if the FICO credit score is lower, in 20-point increments. If your buyer gets quoted the national average rate with lender fees, then you know right away that they can do better with 50% of the lenders out there. It’s simple to keep an eye on lender pricing every day when you know where to look to find the national average. * Your buyers will thank you with their referral of friends and family.
A more significant issue than mortgage rates will be property taxes for the rest of this year. Helping buyers qualify for their mortgage will be more challenging for closings that occur after October 1, when the 2022 tax bills are finalized and Tax Certificates reflect this update. With the new 2022 bill, lenders will now look at the (most likely) higher 2022 taxes, which makes that housing payment go up, making it harder to get a lender to say yes to a home buyer who is tight on income to qualify. For buyers going under contract after September 1, with 30 days to close, ensure the Pre-Approval was written based on the new 2022 tax bill, not the 2021 bill.
If rates have risen, what about qualifying for a mortgage? Have lenders made that harder? Short answer, no. Higher rates and property taxes do take their toll, but the underlying lender requirements are not tighter themselves. Lender pipelines are dry, with all the refinances gone. If a loan meets investor criteria (set by Fannie, Freddie, a private investor for Jumbo, or the FHA/VA/USDA guidelines), then dozens of lenders want that loan to close with them. Dozens of lenders hope your buyer chooses them so they don’t have to lay off more workers and close more branches. Access to credit is not tightening with so many lenders desperate for a loan these days.
With more than 40% of lenders not making a profit in Q2 of this year (according to the Mortgage Banker Association) and many lenders slashing personnel (or going bankrupt), lender competition has heated up, driving down lender margins and actually made rates lower than they otherwise would have been. Just think: your buyer is not competing for underwriting attention with a bunch of refinance loans. Just as buyers entered bidding wars on limited homes last year, lenders are now in bidding wars to win new closed loans. For our buyers to enjoy those lower rates, we need to help them compare several offers. Many lenders, if presented with a competitor offer in writing, will match or beat it. If your buyer doesn’t know to do this, though, then the first offer is the only offer they get. And that extra $120/month gets paid every month until they sell the home (or refinance). It’s a missed opportunity to wow your buyer with what you can do to help them save.
So no, it’s not harder to qualify for a mortgage these days (property taxes and higher rates aside). Lenders are still qualifying FHA borrowers, as they always have, with a 600 FICO credit score (and sometimes 580) with only a 3.5% down payment. With credit scores in the mid-600s, lenders can approve a housing payment as high as $4500 (two buyers with incomes of $5000/month, 45% housing debt-to-income ratio). For conventional loans, many lenders will accept a housing payment of $4000 with decent credit and a fair-sized down payment of 5-10% (40% housing DTI).
An easy way to see if your buyer can probably get a mortgage is to take their monthly, pre-tax income and multiply by 45% (for FHA) or by 40% (for Conventional). That’s the housing payment to stay under as you look for homes. Of course, this is just a helpful shortcut. Before you spend a lot of time showing homes, be sure to have your buyer get fully pre-approved before you write an offer (and even then, the lender might deny if the pre-approval wasn’t done properly).
So, what do your buyers need to know about mortgage rates today? “Owning a home today will cost a bit more than back in June ($75 - $150/month, depending on the loan amount) unless we find a lender with a lower rate. I can help you compare a few lenders to make sure you get a good deal.” Easy as that. Our buyers are reading news headlines saying that mortgage rates are skyrocketing. Not true, but scary headlines do get clicks. The reality is that savvy home buyers and the REALTORS® who help them are always able to negotiate better purchase prices on homes, better terms, and find those lenders offering great deals. You just have to know where to look.
* Rate data is provided by Mortgage News Daily, which tracks real-time bond pricing and lender rates. You can view this data in real-time right here:
The CCAR Professional Development Committee wants to hear from you! When you get the CCAR Continuing Education survey by email, be sure and fill it out. Let the Realtor and Lender Committee know if you want classes about the mortgage process. If you’re not confident about your Mortgage 101 basics, put that on the survey so we’ll know to offer mortgage classes next year.