Consultative Selling For Borrowers With A Variable Income Stream

by Aidan Paringer

Let’s say you have new clients, Eric and Carla Wilson. They’re buying a house for $450,000 and they need a mortgage for 80% or $360,000. They’re looking for the cheapest possible deal on a mortgage because the house ended up costing more than they planned. They want a thirty year fixed; they ask you “what’s the rate?”

Check out our full article on consultative selling techniques for mortgages.

Instead of answering right away,

you use your new consultative sales approach and ask them a series of questions about how they make money and how they get paid. Eric says he works in sales with a base salary and commission. His base is $55,000, but the commissions can be as much as 80% of his base. However, that income isn’t paid out on a consistent basis. He can go six months without a commission check then get a big one in Month 7. Carla says she works in health care where she makes $45,000 while going to school nights. You ask about the degree she’ll get, when she’ll finish, and how much she’ll make when she’s done. Turns out she’s earning a degree in geriatric care that has very few well trained practitioners. Once she’s done, her income will double. But she has to go part time, so it’ll take five years before she’s done. She won’t be getting that income boost any time soon.

Now you ask if either of them anticipate any increase or decrease in liquid assets in the near future. Eric mentions that he’s expecting some money from his late grandfather, but he just passed away, and the executor told him it could take at least a year to settle the estate. Eric doesn’t know exactly how much he could get, but based on his grandfather’s assets, he thinks he would get around $10-20,000.

Once you’re done with questions, they repeat: What’s the rate?

You could quote them a rate, but now, based on the information you have gathered, you’re ready to offer something much more valuable: a finance plan that will take into account the specifics of their situation and offer affordable payments with low interest rate risk. 

You tell them about a 5/1 adjustable rate mortgage which offers a rate that’s 3/4% lower than thirty year fixed. The payments are $1,517.77 before tax and insurance, compared to $1,667.22 for the 30 year fixed. Is that $150/month saved meaningful to them? It is right now. Eric figures out they would save over $9,000 during the first five years. At the end of year five, Carla’s income should double, which will enable them to handle any potential increase in payments. Plus, with the money they’ve saved and with Eric’s inheritance, they could make a pay down to principal at the end of year five. The loan will automatically recast based on their new rate, outstanding balance, and remaining term. It’s like refinancing without the time and expense of refinancing. 

They’re not 100% sold on the ARM, but they like the idea you’ve put forth. It takes into account their specific financial situation and earning potential. They ask you if you have another innovative ideas. They trust you, and what you have to say. You are now seen as a trusted adviser.

You tell them about an interest only loan,

which would give them payments of $1,425.00 per month, but as with any loan, there are pros and cons. The main benefit is that the interest rate doesn’t change like with an ARM. The rate stays the same for the full thirty years, but the payments do not stay the same. For the first ten years, they just pay the interest. After year 10, the loan resets to a new payment schedule based on the outstanding balance, remaining term (20 years), and initial interest rate. The payments will go up. However, with an interest only loan, if Eric gets a large commission check or the money from the estate and they want to make a pay down to principal, the monthly payment adjust immediately, just like it did with the adjustable rate mortgage. They like this plan, but they can tell you’re not done. 

You ask if they’ve ever considered waiving the requirement to have an escrow account with their mortgage. Normally, a mortgage payment includes property taxes and insurance. For the house they’re buying, taxes are $10,000 a year, which adds $833 a month to their monthly payment. Wouldn’t it be good if their payment was just the $1,425 or $1,517 and they paid the taxes directly to the town when they’re due? You go over the positives and negatives of waiving escrows. Yes, it keeps your monthly payment low, but Eric and Carla would need to have enough fiscal discipline to set aside money every month so that they have sufficient funds when the tax bill arrives. You tell them waiving escrows is popular for borrowers who bear a high property tax burden but have lumpy income (like commission or bonus) and want to keep their overhead as low as possible. They consider this option, but decide they prefer the forced budgeting of having an escrow account. They say you are the first loan officer who ever brought up the idea of waiving escrows to manage their budget.

Finally, you tell them about a thirty year fixed.

Pros? The rate and payment never change. Downside? Any pay downs to principal come off the end and don’t affect the monthly payment. Between Eric’s inheritance and Carla’s increase in income, a thirty year fixed doesn’t sound like the right loan program for them anymore. They are grateful to you for your knowledge and for asking questions about their situation. You have come up with some custom solutions for them. Solutions that have pros and cons, like any loan, but more pros than cons, given what you know about them, their tolerance for risk, and their earning profile. You have earned their trust. Bottom line, you have used a consultative sales approach to help your customer and help yourself.

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