Where first-time homebuyers are concerned, good rates aren’t everything. A lender who is willing to guide them through the home-buying process, however, is priceless.
But before a credit union can demonstrate its friendly philosophy to buyers, it must entice them through the door. That can be hard to do because many first-time buyers face all sorts of obstacles to homeownership. Demographics, poor credit, and challenging local housing markets all play a role, sometimes simultaneously.
Below are four ways that cooperatives can better attract first-time buyers and ramp up their purchase mortgage activity.
1. Believe In The Transformative Effect Of Home Ownership
First-time homebuyers come from all demographic groups, and credit unions can’t afford to overlook any of them. According to 4Q 2013 data from the US Census Bureau, home ownership rates for those under 35 — the median age for first-time buyers — is just 36.8%, roughly half the rate of those ages 45 and up. Even more disturbing is the fact that there is up to a 30% difference in ownership rates between white borrowers and people of other races and ethnicities.
Exceptions to these discouraging trends do exist, but they are hard fought and forged — often cropping up in the most unexpected of places.
For example, mortgages currently make up the lion’s share of the loan portfolio at Hope Credit Union ($187.8M, Jackson, MS), which aims to fill the capital gap that disproportionately affects entrepreneurs, women, and people of color along the Mississippi Delta. About 86% of the mortgage loans that Hope made last year went to first-time homebuyers, a large percentage of whom were also minority, female, or low-income individuals.
These “high-impact loans,” as the credit union calls them, help improve the region’s economy while breaking the cycle of poverty that has plagued some local families for generations. Although you won’t see it catalogued in a call report, a full 60% of Hope's homebuyers last year reported that their kids did better in school because they lived in a safer neighborhood.
“I really think it is a matter of will,” says CEO Bill Bynum of Hope’s commitment to these borrowers. “There are certain communities that others are walking away from, but as a credit union, our profits are directly tied to the fate of our members.”
2. See The Field For The Flowers, Not The Thorns
The recession was a financial battlefield for many Americans, but even today, so many institutions remain hesitant to triage the wounded, preferring instead to label all less-than-perfect borrowers dead on arrival.
That approach simply doesn’t fly at Hope, where the institution’s three-person mortgage underwriting team frequently connects non-traditional homebuyer candidates to opportunity despite abundant obstacles, including an average borrower income of around $40,000 and marred or non-existent credit histories as par for the course.
"If someone doesn't fit traditional underwriting criteria, we see if there are less significant items like a phone bill or a subscription that hasn't been paid and is causing issues," says Shirley Bowen, Hope’s senior vice president of mortgage lending.
If the lapse was more significant, including missed payments for rent or a car loan, the credit union then determines whether it was because of a temporary setback like medical bills that were beyond the borrower’s control.
Long before the Consumer Financial Protection Bureau began recommending such measures to financial institutions, Hope had proactively adopted the VA method of residual income for weighing a borrower’s ability to repay. This method not only takes into account how much money the borrower has left after paying monthly bills but also varies qualifications by region so that those in low-income areas aren’t shut out.
By looking beyond superficialities, Hope has been able to grow its adjustable and fixed real estate loans by 2% and 8% respectively year-over-year while keeping mortgage-related delinquencies at a manageable 50 basis points.
3. Grant Access For Special Cases
The first rule of real estate is location, location, location. So perhaps it’s surprising that many cooperatives that have excelled in the first-time homebuyer space are not necessarily located within some uncanny bubble of real estate opportunity. Sometimes in fact, it’s just the opposite.
For example, Jackson currently has an abundance of vacated property thanks to decades of economic hardship, the more recent recession, and a mass exodus of the middle class. However, Hope’s affordable housing product — which sometimes uses a grant to lower the LTV ratio and allows borrowers to go as high as 100% financing following a comprehensive credit counseling process — has proven an effective tool for encouraging members to participate in alleviating this inventory and improving neighborhood home values.
By working with the Federal Home Loan Bank of Dallas and Home Again, Inc., Hope also provides funding to secure and rehabilitate foreclosure properties and get them back on the market affordably for families in need.
Because first-time homebuyers aren’t typically known as big spenders, regions with especially high demand or inflated home values can also present their own set of challenges. In March 2013, home purchases by cash-laden investors rose 40% year-over-year compared with just 2% growth for other buyers, according to a study by Radar Logic, a data and analytics firm.
A combined mortgage and renovation loan, which many credit unions offer, is a great way to help first-time borrowers better compete for fixer-upper opportunities.
In more rural markets where buyers may have the means but can’t find properties to suit their needs, some coopertatives may also choose offer a construction-to-permanent mortgage loan.
Typically, this type of loan would require a huge upfront investment from the borrower, says John Phipps, the chief lending officer of Heritage Federal Credit Union ($474M,Newburgh, IN), and this can knock many first-time buyers out of the running. Most are also balloon loans, requiring a refi at the end of the building process.
To remove these roadblocks, Heritage currently offers a fixed loan with a one-time close that requires as little as 5% down. Although the member pays interest during construction, once the house is finished the loan is amortized over the remaining term at the rate initially agreed upon.
This and other purchase-oriented products have helped Heritage tune in to the needs of local borrowers. And as of 1Q 2014, roughly 40% of its mortgage loans have gone to first-time buyers.
4. Make New Connections
To encourage home purchases, credit unions typically need realtor and broker partnerships, but competition for these partners is fierce. That's why credit unions looking to get ahead with first-time borrowers should also pay attention to all the other feeders and channels that these individuals rely on to educate themselves and influence their decision-making.
“At Heritage, we’re looking to do some continuing education programs to bring realtors in and make them aware of what we have,” Phipps says. “But our mortgage originators are also getting involved in networking groups that are not traditional.”
Everyone calls on realtors, but accountants and financial planners have clients who need mortgages too, he says.
In many markets, virtual connections have become just as important as human ones. According to the National Association of Realtors, 43% of buyers in 2013 found their dream homes using the Internet while only 33% discovered the properties through a real estate agent.
Even if your members are disinclined to shop for a home online, they probably still view the Internet as a prime channel for researching the buying process and comparing their financing options.
For example, at Hope, a self-guided online program from the Housing Partnership Network and Minnesota Homeownership Center called FRAMEWORK allows potential first-time homebuyers to learn more about the terminology, processes, and professionals involved, including lenders, home inspectors, and realtors.
These electronic offerings can be convenient, says Laura Howe Repp, Hope’s senior vice president of community development. But they’re no replacement for in-person counseling.