Real Estate Agents while not lenders or insurance agents (generally), are obliged to learn as much as they can about the industry as it applies to the purchase of residential property. Agents who have been in the industry for a while understand that without getting a handle on a client’s financial situation, it’s nearly impossible to help them buy a house or even sell a house.

In addition to the financial aspects of the mortgage, prospective clients need to determine if they can afford insurance on the property they are interested in. Real estate agents understand that the lending industry has been hit hard by higher interest rates. Buyers understand that rates are higher than they have been and want them to return to the 4-5% range at a minimum. Not only have home prices gone up in some areas, but homeowners insurance has taken a very large leap in the wrong direction. It’s very important that real estate agents understand the dynamics of lending and insurance. Explaining lending and insurance to clients will help them avoid sticker shock. If you can get them past the lending and insurance process, you will be able to deal with higher prices more effectively

Part of the lending process is mortgage insurance. Most buyers do not fully understand how it works and the fact that it does not fit in a discussion of a mortgage loan. Here are some highlights of mortgage insurance:

Types of Mortgage Insurance

• Private Mortgage Insurance (PMI): This applies to conventional loans (loans not backed by the government). PMI is required if the borrower’s down payment is less than 20% of the home price. PMI can be canceled once the borrower’s equity in the home reaches 20%.
• FHA Mortgage Insurance Premium (MIP): Federal Housing Administration (FHA) loans require mortgage insurance regardless of down payment size. FHA loans require both an upfront MIP and an annual MIP that’s paid monthly. Unlike PMI, MIP often lasts for the life of the loan unless a 10% down payment was made, in which case MIP is required for only 11 years.
• USDA Loan Guarantee Fee: USDA loans also require a form of mortgage insurance in the form of an upfront guarantee fee and an annual fee. This applies to loans made through the USDA Rural Development program.
• VA Funding Fee: For VA loans (loans for veterans), the VA funding fee is a one-time charge that helps cover loan costs and supports the VA home loan program. Although it’s not technically mortgage insurance, it serves a similar purpose of offsetting risk for the government-backed program.

2. How Mortgage Insurance Works

• Monthly Premiums: Most mortgage insurance policies are paid as a monthly premium along with the mortgage payment. These premiums typically add 0.3% to 1.5% of the loan amount to the annual cost, depending on down payment size and credit score.
• Upfront Premiums: Some types of mortgage insurance, like FHA MIP and USDA guarantee fees, may also have upfront fees, which can be paid at closing or rolled into the loan.
• Duration: For PMI, it can be canceled once the borrower’s loan-to-value (LTV) ratio reaches 80% through regular payments or appreciation. FHA loans, however, may require MIP for the entire loan term unless specific requirements are met.

3. Who Pays for Mortgage Insurance?

• Generally, the borrower is responsible for paying mortgage insurance premiums. However, some loan programs or lenders might offer to cover these costs by increasing the loan’s interest rate, a process known as “lender-paid mortgage insurance” (LPMI).

4. Impact on Borrowers

• Mortgage insurance enables borrowers to purchase a home with a smaller down payment, making homeownership more accessible. While it adds to the monthly cost, it can help borrowers who may not have substantial savings for a large down payment.
• Cost Examples: For example, if you have a $200,000 loan with a 1% annual PMI rate, your PMI would cost about $2,000 per year, or approximately $167 monthly.

Mortgage insurance is beneficial for lenders and allows borrowers to buy a home sooner but comes at an added cost until sufficient equity is built in the property.

The following are requirements that borrowers must comply with in order to receive a mortgage loan for their new home. It’s very important that any potential clients go through this process of identifying to the real estate agent how they meet the qualifications. The end result is that the buyers will receive a letter from their lender pre-qualifying them. Lending and insurance costs will be taken into consideration by lenders for the ratio calculation. It’s time to start shopping for a house after you have cleared all of the lending and insurance obstacles

Mortgage Loan Eligibility Requirements

Becoming proficient in both mortgage lending and insurance programs will help your client decide how much house they can afford. And in some cases where they can afford to buy e.g., insurance rates vary with geography. Start your search for information by working with a mortgage broker that you trust. Someone who other agents and clients recommend. A good mortgage broker can help you understand the basic programs available depending on the financial situation of your client and where they intend to buy. For example, some areas are eligible for USDA no down payment loans for lower-income borrowers. It’s good information to have regardless if you are representing the buyer or seller. In the example of the USDA loan, the following are the basics:

USDA Loan Requirements

Eligibility

• Income: Household income must be below 115% of the median income for the area.
• Credit Score: While there’s no strict minimum, a good credit score can help with eligibility and interest rates.
• Location: The property must be located in a designated rural area, as defined by the USDA.

Benefits

• No Down Payment: One of the biggest advantages is the ability to purchase a home without a down payment.
• Lower Income Limits: Income qualifications are generally more lenient than conventional mortgages.
• Competitive Interest Rates: USDA loans often offer competitive interest rates.
• Closing Cost Assistance: Some programs may offer assistance with closing costs.

Requirements

• Occupancy: The borrower must occupy the home as their primary residence.
• Property Standards: The home must meet specific property standards set by the USDA.

Potential Drawbacks

• Limited Availability: USDA loans are only available in designated rural areas.
• Mortgage Insurance: Like other mortgage types, you may need to pay mortgage insurance.

You can go to the USDA website https://rdhomeloans.usda.gov/ for more information. Each of the programs available in your area has a website with more information. Become familiar with them and you will show our clients how talented you are when it comes to assisting them with the decision about where to go for financing. Don’t be afraid to refer your client to the loan broker that you know will help them and answer their phone calls.

Learn the qualification points for both credit and debt-to-income ratios. Have access to calculators that will help you help your clients. Explain to them how the mortgage business works and the things they will have to do before they can become pre-qualified. Do you know about wrap-around mortgages?

Lots of options

While many real estate agents are familiar with traditional mortgage options, there are several less common types. Here’s a list:

1. Interest-Only Mortgages: Payments cover only interest for a set period, then principal and interest.
2. Balloon Mortgages: Require a large lump sum payment at the end of a short term.
3. Shared Appreciation Mortgages (SAMs): Lender shares in home appreciation in exchange for lower interest.
4. Reverse Mortgages: For homeowners 62+, the lender provides monthly payments based on home equity.
5. Construction-to-Permanent Loans: Covers both home construction and subsequent mortgage.
6. Jumbo Mortgages: For loan amounts exceeding conforming loan limits.
7. High-Balance Loans: For homes valued above a certain amount, but not jumbo.
8. Wrap-Around Mortgages: Seller retains existing mortgage while borrower makes payments to them.
9. Portfolio Loans: Not sold on the secondary market, often offered by smaller lenders.
10. Physician Loans: Tailored for medical professionals with specific terms and benefits.

Just when you thought you knew all of the various mortgages that your client may be interested in, there are yet more to consider. Some may call it “Where there is a will, there is a way”. This is why it’s often advantageous to work with a mortgage broker rather than a single-source bank for clients with challenged credit circumstances. The more you know, the better agent you can be.

Interest Rates (current average national)

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Homeowners Insurance

Insurance is a business often misunderstood because of the complexity of rating properties. All we usually know is that the rates go up. There is much however that you as a real estate agent can understand and pass along. The biggest thing you can offer to your buyer clients is the condition of the roof. Number two is how orderly the property is. No trees over the roof, junk in the yard, or safety hazards such as missing handrails. Home buyers do not know these things generally so it’s up to the real estate agent to understand what insurance inspectors look for.

The best way to learn is to spend time with a real estate broker. Go to lunch periodically and pick their brains about the latest trends. Years ago, insurance companies rarely inspected homes, now they inspect far more frequently.

Homeowners insurance is regulated by the state. Insurers come and go. A typical insurance company will come to an area with a goal of creating x new clients or writing X$ of policies. If risks are greater than forecasted or they reach their goals, they will stop writing new policies. When fewer insurance companies are available the cost rises. Most buyers have no idea about how the insurance system works, they just pay their bills.

They do not know it’s better to buy a full-year policy rather than 6 months or monthly. Real estate agents should learn enough to discuss why their policy quote will be high (if that’s the case). Agents can lessen the shock by being up front with their clients that due to the fact they are located in a natural disaster zone (if that is the case), a wind and hail policy will be required.

Discuss the deductible, the fact that it can cost thousands of dollars out of pocket in the event of a named storm or tornado. The best agents know that a fully informed client will be easier to work with when they see the actual numbers for these costs.

Flood Insurance

If the properties that your clients want to see are located in a flood zone, discuss this with them. Explain what flood zones are and how lenders will require flood insurance if the property is not in a 500+ year flood zone or better. Show them where to find the flood map or print one for them. Explain the typical cost for a flood policy for the first year and that it is a one-year policy with a maximum insured value. FEMA offers flood insurance and independent carriers also offer flood insurance.

What determines the cost of insurance

The frequency of inspections varies greatly depending on several factors:

• Insurance Company Policies: Some companies inspect all new policies, while others only inspect high-risk properties or those in specific areas.
• Buyer’s credit report: A good credit report above 720 will have the biggest impact on insurance policy pricing in a manner similar to obtaining a mortgage
• Home Age and Condition: Older homes or those with known issues are more likely to be inspected.
• Claim History: Homes with frequent claims might be targeted for inspections. CLUE report
• Geographic Location: Areas prone to natural disasters often have stricter inspection requirements.
• Insurance Coverage Amount: High-value homes may undergo more thorough inspections.
• Home maintenance: Install a whole-house surge suppressor and receive a discount. Add a monitored alarm system for an additional discount.

How has the average homeowner’s insurance policy increased in cost?

Basically, homeowners insurance is offered by companies after looking at the items above and using their own proprietary software to produce a price. Explain the CLUE report which is like a credit report for a house. The CLUE “Comprehensive Loss Underwriting Exchange” records all claims against a property. We are often told that they do a seven-year look back. It’s not possible to be sure that old ones actually drop off.

The CLUE report is not just for houses, it is for every insurance claim including autos you have ever reported. This system even records serious inquiries you have made to your agent and decided not to pursue. Even if the claim was denied, it’s still there and will be a factor.

The following is a sample of a CLUE report so you can see what data is gathered. Now you know why the last thing you want to do is make a claim against your property insurance when the amounts are small and you can manage them. Even a call to your agent may be included in a report even when you do not actually make a claim.

In areas where a storm creates damage and the repair is estimated to be below the deductible or close to it, consider before you call. Should you decide to repair the damage on your own, do not call the insurance company for a quote because that conversation is likely to be in their file. All of this information will be appreciated by your client. Become a near expert in insurance as you should in financing as well.