As the media continues to highlight the rise in interest rates, it sparks a lot of questions for those entering or in the market to purchase real estate. Fluctuating interest rates on the rise, impact a buyer’s buying power and what they can afford, and when clients don’t lock in their rate, it can cause a whole host of issues as you try to close “on-time” if you haven’t done your homework and kept up with mortgage rates and your mortgage broker partners.
Here’s what you need to help your clients understand as they go through the process of purchasing a home and the financing aspects of it. The lower the interest rate, the lower the house payment, the lower the interest rate the “more house” a person can qualify for and afford. I’ve heard many Realtors® suggest that watching interest rates isn’t in their job description and that they depend on the mortgage brokers they partner with to watch the rates while they keep up on the housing market. Looking at how higher interest rates can change the financial picture of a buyer may put things in to perspective on why it’s so important to understand and know what’s going on with interest rates.
These are the basics of what you and your clients should understand about how rising rates can impact the purchase of a home:
Interest rates on most loans must be “locked in”: Locked-in means an agreed to interest rate between you and your lender for a set period of time. Interest rates fluctuate daily just like the stock market. When interest rates increase and you’re locked in to a rate, the rate you have is guaranteed IF you fulfill all of your lending conditions by the time your lock expires. No matter what happens with the lending market and rates, your loan is locked in at an agreed upon to when you lock. Locking a rate in is like flipping the “go” switch on you real estate transaction, you’re committed, the timer is ticking and all lending conditions must be met by the deadline of the interest rate lock or the loan won’t fund.
The loan amount a buyer is approved for and the interest rate locked-in on is based on a formula of affordability/ability to repay the debt, down payment, current employment/work history as well as credit history. ANY minor change to any of the factors listed above could change the terms of the loan, which potentially means starting over or no longer qualifying. ANY change in that formula, as small as applying for a Target charge card, thinking about buying a car (so you get a credit check at the dealership), shopping for furniture with your Macy’s card, selling an asset, starting a new job, making changes in your employment, starting a new business, buying a car for cash, renting something, transferring money between accounts, borrowing money, depositing large sums of money, anything having to do with money, credit, jobs, savings accounts, retirement accounts could impact a home loan not funding. Any potential change needs to be discussed with the mortgage broker handling the loan BEFORE it’s done. Making minor changes to your financial or work life during the process of purchasing a home could lead to things falling apart.
Once an offer is accepted on a home, it’s imperative the lender be alerted and involved immediately. Getting a loan funded for hundreds of thousands of dollars is no easy task and it takes time, paperwork, a paper trail and proof of borrowers ability to repay the debt. If interest rates have increased since the time you were pre-approved, you may not qualify for the loan amount any longer. When interest rates increase, so do monthly payments. If you qualified for $250,000, but the rates have increase by .75, you may only be able to qualify for $225,000.
Never assume no news is good news with lending…EVER. Constant communication with the lender is imperative and can help things run so much smoother. Many lenders are nervous to be in touch when things aren’t going smoothly on their end, home loans go “sideways” all the time for many different reasons. It’s imperative for the Realtor® and the lender to keep in constant contact, no less than once a week to check status and compare notes on what’s needed, there is never a shortage of “things” needed in a real estate transaction. When everyone works together as a team running towards the same finish-line things always go much smoother.
There are very few buyers out there that don’t need financing and having a good relationship with a mortgage broker will improve your odds substantially of closing more escrows.